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Gratuity allowed

Mihir (Wealth Manager) (5293 Points)

03 September 2013

A company makes yearly provisions for gratuity in their books of accounts for those employees who have been working for more than 5 years. An employee resigned and gratuity was paid accordingly to the calculation.

I heard that such expenses shall be disallowed because the company did not have a gratuity fund with some insurance company. Is there a rule that the company has to pay the gratuity from a gratuity fund with an insurance company, and if gratuity paid from own funds, then expenses shall be disallowed? Please confirm.

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2 Replies

Neeti Mishra (Job) (28 Points)
Replied 03 September 2013

Dear Mihir,

As per AS 15 for employee benefits, a company should maintain the gratuity amount with a fund which is third party and not the company itself. The gratuity amount needs to be maintained with an approved fund as mentioned by the official gazette from time to time. Generally, it is the LIC or a scheduled bank or post office account for depositing the gratuity amount as per law. For any other approved institution, check the official gazette for the same.

In your case, the company making provisions in the books is merely considered an entry in the books unless the same amount is deposited with an approved fund or trust and hence disallowed.