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Full withdrawal from gratuity trust

14 November 2018

Hi All,

Our organisation has Gratuity trust and the same is registered with Income tax for exemption. The fund is with LIC through Trust. Now our Company is going to close down the business. Now LIC has instructed that first we have to apply to surrender income tax exemption and then LIC will release the full fund to trust.

During this process, Can Company pay gratuity to all employees and when the fund will receive from LIC into trust, then the same will be transfer from trust to company. Is it allowed?

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6 Replies

Nivedita (SME - Finance) (758 Points)
Replied 14 November 2018

You can check this attachment.

This comprises of the agreement b/w LIC & any entity where Gratuity funds are with LIC.

Attached File : 1538604 20181114112254 gftrules.pdf downloaded: 951 times

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Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 02 March 2019

Tax Benefits of setting up a Gratuity Trust?

Gratuity benefits are governed by “The Payment of Gratuity Act 1972” and paid by the Company to an employee in addition to his salary on exit from the company. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, –

(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:

Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. It means, Gratuity amount can be determined only on the monthly terminal wages of the employee on his exit from the Company after completion of 5 years of Service. The cost is to be borne by the Company and not by an employee. hence, unlike other fringe benefits (i.e. Medical Insurance, Term Insurance & Accidental Insurance) it can not be part of CTC.

To understand this, let us take an Example,

Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Assuming that expected increase in basic salary is assumed to be 10% p.a.

Now Gratuity Payments for next 5 years will be :-

On Completion of 1 Yr – (15/26)* 28,600*1 = 16,500/-
On Completion of 2 Yrs – (15/26)*31,460*2 = 36,300/-
On Completion of 3 Yrs – (15/26)*34,606*3 = 59,895/-
On Completion of 4 Yrs – (15/26)*38,067*4 = 87,847/-
On Completion of 5 Yrs – (15/26)*41,873*5 = 1,20,788/-

Now for making the payment of gratuity, Company has 2 options :

(i) Pay as you go option – Where company makes a provision of Gratuity in the Balance Sheet on the accrual basis taking an actuarial report on BS date from an Actuary and as and when Mr. A leaves the organization, company pay gratuity from their resources and get the tax benefit for the gratuity paid.

Expected Tax Benefit calculation in case of “Pay as you Go Option” :-

For Provision of 1st Yr – NIL
For Provision of 2nd Yr – NIL
For Provision of 3rd Yr – NIL
For Provision of 4th Yr – NIL
For Payment on 5th Yr – 1,20,788/-

In this case company, Mr. A will leave the company then company will get the tax benefit of Rs. 1,20,788/-.

(ii) Funding Option – In this option, Company decides to Setup an Approved Gratuity Trust . The Investment of Company is either “Self Managed ” or “ Managed by Insurance Company”. Company contribute the annual contribution in this Gratuity Trust and get the Tax Benefits. In this case, when Mr. A will leave the company, gratuity will be to Mr. A from the Gratuity Trust.

Expected Tax Benefit calculation in case of “Funding Option” under Section 36(1)(v) of the IT Act 1961 for Annual Contribution which is 8.33% of Annual Basic Salary of Employee.

For more details, you may visit my write up at https://www.citehr.com/609164-benefits-setting-up-gratuity-trust-companies.H T M L

We have provided consultancy for administration Gratuity Trust Fund in the various organization in all sectors of Indian Economy on receipt of their Management request and If you wish to know details like:-

1. Who can be covered under Gratuity Trust Fund?
2. How can companies administer Gratuity Trust and avail of the tax benefits?
3. Benefits to Employer,
4. Benefits to Employee,
5. Gratuity Trust Fund -Interpretation of Tax Implications.

We may also be contacted for the structuring of other Retention Schemes, Group Health Insurances, Group Terms Insurances, Group Annuity Plans, Group superannuation Plans, Property/Fire Insurances and investment in 100% risk-Free Government of India Bonds (GOI Bonds)

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 08 May 2019

I hope below write up may give more clarity on the provisions of Payment of Gratuity Act 1972 (Amended)”

Under the provisions of the Payment of Gratuity Act 1972 (Amended), gratuity is a statutory obligation on the shoulders of the employer to make the payment of Gratuity to his employees as soon as it becomes payable (Refer Sub Section (2) of Section 7 to the Act).

Applicability

Compliance of this act is applicable to all organizations such as a factory, mine, oilfield, port, railways, plantation, shops, establishments or Educational institution having 10 or more employees on any day in the preceding 12.

Determination of Gratuity Amount

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.

Conditions for payment of Gratuity

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

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

Gratuity Benefits depends upon the 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

Provisions for Employer under Payment of Gratuity Act 1972 (Amended)”

Section 7 of the Act has kept obligation for payment of gratuity act on the shoulders of the employer, few provisions of the act are listed below:-

1. As soon as Gratuity becomes payable, it employers responsibility to determine the amount of gratuity and inform it to the employee in writing (Refer Sub-Section 2 of Section 7 of the Act).

2. The employer shall arrange to pay the amount of gratuity within 30 days from the date when it becomes mandatory. (Refer Sub-section 3 of Section 7 of the Act).

2. If the amount of gratuity is not paid within 30 days then the amount of gratuity and simple interest will be paid by the employer to the employee for the duration when the payment is not made to the employee. (Refer Sub-section 4 of Section 7 of the Act).

Accounting of Gratuity by the Employer

The Companies Act regulates/prescribes the Accounting Standard/Accounting Standards for the accounting of payment of Gratuity in the Financial Statements of different organizations. The compliance of Accounting Standard/standards is mandatory in nature.

The Institute of Chartered Accountants of India prescribes following Accounting Standard/standards for accounting of Gratuity by the companies:-

Accounting Standard 15 (Revised 2005)

Ind AS 19

For Accounting of Gratuity by Schools, The Institute of Chartered Accountant has issued Guidance note on Accounting by Schools (2005) or as amended at time to time.

Under the accounting preview, gratuity falls in the category of the defined benefit plan and is a post-retirement benefit. The nature of computation of post-retirement benefit is complex and hence Actuarial Valuation Certificate/ Report of an Actuary (Para 49 of AS 15 Revised 2005) forms the basis of accounting provisions of gratuity in the financial statement.

Income Tax Rules for Gratuity

Accounting provision of gratuity in Financial Statements/Balance Sheet is not allowed as a deduction under Section 40A(7) of Income Tax Act, 1961 (as amended time to time). The Section is produced below:-

“ (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of Gratuity to his employees on their retirement or on termination of their employment for any reason.

(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.”

For gratuity payment management, the employer has the option to fund the liabilities for payment of gratuity by setting up an irrevocable trust approved in terms of part c of the fourth schedule to the income tax act, 1961.

The contributions made by the employer in such trust is allowed as a business expense under section 36 (1) (v) of the income tax act, 1961. This section is produced herein below:-

“ (a) any sum paid by any sum paid by the assessee as an employer by way contribution towards an approved gratuity fund created by him for the exclusive benefits of his employees under an Inrrecovable Trust.”

For more details in the above matter then you may contact us at 9211637063 or email your requirement at tikaramchaudhary @ gmail.com.

I have 10 years of experience in providing consultation and have a team of leading Finance professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies. In my 10 years of experience I have given consultation to CFOs, Directors, Heads of HR, Finance and Tax Planning department of the Companies, spread in all sectors of the Indian Economy, in the Public & Private Sectors which covers areas of Manufacturing, Software, Technology, Electricity, Electronics, Call Centers, Banks, Educational Institutes, Schools, Universities, Hotels, Hospitals, Hospitality Companies, etc. etc.

We offer consultation for the following services:-

Consultation for Traditional and Unit Linked Group Gratuity Schemes.

o Traditional Group Gratuity Schemes of LIC

o Unit Linked Group Gratuity Schemes of Private Insurance Cos.

Consultation for Restructuring of Gratuity or Leave Encashment Policy.

o For Retention of Most Productive Employees.

o For Enhancement Productivity and Liability Management.

Consultation for all types of Business Valuations

o Actuarial Valuations

o Capital Gain Valuations

o Property Valuations

o Machinery Valuations

o Shares Valuations

Consultation for Employee Retention Schemes, Retirement Investment in Annuities, Marine Insurances, EAR Insurance, Corporate Property, and Fire Insurances.

Tikaram Chaudhary

Group Gratuity Trust Fund Consultant

Office Address : R 11, F/F, R Block, Vikas Nagar, New Delhi -110059

Mobile Number : 9211637063

Email Id : gratuityconsultant @ gmail.com

Blog: https://gratuityconsultant.blogspot.com

Website: https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/

LinkedIn Profile : https://www.linkedin.com/in/tikaram-chaudhary-a5727848/

(All Consultancy Services provided by us are subject to terms & conditions will be stated when a consultation job is accepted.)

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 28 February 2022

Gratuity Trust Fund Consultant (GTFC) is a Corporate Consulting Firm. Our Firm has a Team of Lawyers, Company Secretaries, Chartered Accountants, Actuaries, Merchant Bankers, Labor Law and Investment/Insurance Professionals with decades of experience for providing Actuarial, Accounting, Investment, Insurance, Labor Law and Investment Solutions to more than 500 Indian, US, UK, UAE Multinational Companies in following matters :-

A. Actuarial Valuations Solutions for Indian Companies
a. AS 15 (Revised 2005),
b. IndAS 19

B. For US, UK, European, UAE, Nepal, Srilanka, African & Nations Companies
a. IAS 19 (Revised 2011) - IFRS
b. IFRS 17,
c. NAS 19 (NFRS) - Nepal Accounting Standard for Employee Benefits Accounting
d. LKAS 19 - Srilanka Accounting Standard for Employee Benefits Accounting
e. USGAAP &
d. FINANCIAL CONDITION REPORT (FRC) in compliance of Captive Insurance Rules 2021, UAE.

C. For Compulsory Gratuity Insurance and Group Gratuity Schemes under Irrevocable Trust in compliance of :-

The Payment of Gratuity Act 1972,
The Payment of Gratuity Rules,1973*
Indian Trust Act 1882
Income Tax Act, 1961
Income Tax Rule and other relevant Acts and Rules,

D. Formation of New CIT Approved Gratuity Fund,

E. Approvals from CIT for Old unapproved Gratuity Funds, Merged and Demerged Gratuity Funds,

F. Drafting of Gratuity Funds Trust Deeds, Trust Rules, Boards Resolution, Applications for CIT approvals in terms of Part C of Schedule IV of IT Act. 1961 and other relevant documents for new and old Gratuity Funds

G. Investment Advisory for Investment of Trust Money.

H. The Payment of Gratuity Act and Rule compliances such as
Form A ( Notice of Opening),
Form F (Nomination),
Form U ( Display of Abstract of Gratuity Act and Rules) for New and Old Companies.

I. Guidance and Assistance in preparation of employees data, financial and demographic assumption, plan provisions of Gratuity, reconciliation of Assets held in Gratuity Fund, etc. etc. required for Actuarial Valuations for assessment of Initial and Annual Contribution into the Gratuity Trust of Companies and compliance of Accounting Standards

J. Audit and ITR Filing Solutions for approved and unapproved Gratuity Funds of Indian and Multinational Companies.

In case of any requirement email your queries/requirements on the above matter at tikaramchaudhary @ gratuitytrustfund.com

Nitin H (Private) (29 Points)
Replied 07 August 2022

For any assistance required with respect to Gratuity trust, superannuation trusts or any employee benefit schemes, do connect on below mentioned email id a1consultancyservices @ yahoo.com. We are a 9 year old firm entrusted by many indian and multi national companies, we are specializing in the field of corporate employee benefits. Thanks..