Formation of gratuity trust

The Payment of Gratuity (Amendment) Act 2018 provides Social Security to Employees working in all organizations such as a factory, mine, oilfield, port, railways, plantation, shops, establishments or Educational institution (i.e. Schools) having 10 or more employees on any day in the preceding 12.

The amount of Gratuity payable to an employee on his exit from service, according to “The Payment of Gratuity (Amendment) Act 2018 ”, in force at present, is:-

(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

This is subject to a ceiling limit of 20,00,000/- effective from 29.03.2018.

Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:

(a)     On his superannuation

(b)     On his resignation

(c)     On his death or disablement due to injury or disease.

In the case of (c) vesting condition of 5 years does not apply.

Gratuity Benefits depends upon last drawn monthly wages and is linked to the length of service, normally it goes on increasing from the time when the employee joins service and the time of his exit from service due to following factors:-

(a) Annual Increase in Past Service of Employee.

(b) Annual Increase in wages of Employee.

(c) Increase in Benefit Formula of the Gratuity due to amendment in The Act,

(d) Increase in Ceiling Limit on Gratuity Benefits due to the amendment in The Act,

(e) The decrease in waiting Condition of 5yrs. due to the amendment in The Act.

(For detailed information for the impact of the above change in Gratuity Visit my blog: https://gratuityconsultant.blogspot.com/2019/03/a-note-on-factors-increasing-gratuity.H T M L)

Due to changes in the above factors/amendment in the Act, the gratuity payments to the Employees at the time of their exit from the organization in event of retirement, resignation, disablement/ death, increase drastically and it consumes large chunk of organization profits, so it becomes mandatory for organizations to get the Actuarial Valuation Report/Certificate from An Actuary under Gratuity Plan to comply with the requirement for Accounting of Gratuity Benefits in compliance of AS 15 (Revised 2005) and IndAS 19.

 Provision of Gratuity Liability in Financial Statements/Balance Sheet is not allowed as a deduction until and unless organization forms an approved Gratuity Trust as per rules of Income Tax rules, 1962 and make initial and yearly contributions into the Gratuity Trust. The initial and annual contributions made by the organization in an approved gratuity trust are treated as a deduction. Also, Income from the Gratuity Trust Investment is exempted for Income Tax.   

 Formation of Gratuity Trust and Assistance in preparation of Inputs for Actuarial Valuation of Gratuity requires technical and in-depth knowledge of  rules/regulations, amendments of the Payment of Gratuity (Amendment) Act 2018, Accounting Standard/Accounting Standards and hence Consultation of Professionals dealing with this subject becomes mandatory for HR/Accounts/Financial Planning Departments of the organization including Schools.