CHINTANKUMAR PRAVINCHANDRA SHA (proprietor) (32 Points)
23 May 2012Dear All,
I have one client who has created a Group Gratuity Scheme for its Contractual Workers. We have already received PAN card and also going to open a Bank Account. We have prepared Trust Deed. Our scheme is with Aviva Life Insurance.
Now we want to registered with CIT for Approval of the same. In my opinion we have to file Form No.10A for 12AA.
So I want to know whether it is right.
Thanks in advance. It is urgent please
Krishnadas S
(CA Final)
(43 Points)
Replied 28 May 2012
Application for approval.
The application for approval of a gratuity fund is governed under sub-rule (1) of rule 4 of Part C of the Fourth Schedule of Income Tax Rules. It shall contain the following information :—
(a) Name of employer and address, his business, profession, etc., also his principal place of business.
(b) Classes and number of employees entitled to admission to the fund—
(i) in India ;
(ii) outside India.
(c) Place where the accounts of the fund are or will be maintained.
(d) If the fund is already in existence, the details of investment of the fund.
(2) A verification in the following form shall be annexed to the application :—
(FORM OF VERIFICATION
We/I, the trustee(s) of the abovenamed fund, do declare that what is stated in the above application is true to the best of our/my information)
The application for approval of a gratuity fund shall be made in writing by the trustees of the fund to the Assessing Officer by whom the employer is assessable and shall be accompanied by a copy of the instrument under which the fund is established and by two copies of the rules and, where the fund has been in existence during any year or years prior to the financial year in which the application for approval is made, also two copies of the accounts of the fund relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up, but the Chief Commissioner or Commissioner may require such further information to be supplied as he thinks proper.
Tikaram Chaudhary
(Founder of Gratuity Trust Fund Consultant)
(2187 Points)
Replied 25 December 2017
Benefit of Creating Group Gratuity Trust Fund & Impact on Gratuity Liability due to change in the Ceiling limit of Gratuity Amount Payable to employees from "Ten Lakh Rupees" to "Twenty Lakh Rupees" for Companies
In this article I would like to draw your kind attention towards the benefits of creating Group Gratuity Trust Fund & Impact on Financial Statements of Companies due to change in the Ceiling limit of Gratuity Amount Payable to employees from "Ten Lakh Rupees" to "Twenty Lakh Rupees" as The Payment of Gratuity (Amendment) Bill, 2017 introduced in the Lok Sabha on 18 December 2017 for this purpose. You can access the bill by clicking on the following link:
https://www.prsindia.org/uploads/media/Payment%20of%20Gratuity%20Bill,%202017/Payment%20of%20Gratuity%20(Amendment)%20Bill,%202017.pdf
As stated above in the notice of the Bill, it proposes to substitute the words "ten lakh rupees" with the words "such amount as may be notified by the Central Government from time to time" in Sub-Section (3) to Section 4 of The Payment of Gratuity Act, 1972. Thus, the proposed Bill seeks to empower the Central Government to notify the ceiling proposed, instead of amending the said Act, so that the limit can be revised from time to time keeping in view the increase in wage and inflation, and future Pay Commissions.
If the above Bill is passed by both Houses of Parliament in the current winter session, we expect the government to notify increase in gratuity limit (to Rs. 20 Lacs) before 31 March 2018.
Impact on Gratuity Liability due to change in Gratuity Ceiling Limit
As we expect the government to notify increase in gratuity limit (to Rs. 20 Lacs) before 31 March 2018 then it will have a bearing impact on the Financial Statements of 31.03.2018 such Balance Sheet and Profit/Loss of Private Sector Companies because the Gratuity Liability of Private Sector Companies will increase many folds where employees has already accrued their gratuity benefits above 10 lakh but their accrued benefits are restricted due to ceiling of 10 lakh.
The following table this impact :-
https://2.bp.blogspot.com/-03hHGRJwJUs/Wj4adB58JHI/AAAAAAAAJdA/TZKY6fwQqYcfxgzQazONsxGIUNeeHEYmQCLcBGAs/s1600/Impact%2Bof%2BChange%2Bin%2BCeiling%2BLimit%2Bof%2BGratuity%2Bas%2Bon%2B31.03.2018.png
The above table is based on the accrued gratuity benefits by considering their accrued service till 31.03.2018 & basic salary of 31.03.2018 as qualifying salary for their Gratuity benefit computation. From results in above table, we may conclude :-
1. That the accrued liability of 20 employees for their accrued service as on 31.03.2018 for their basic salary of Rupees 13,86,536/- calculates to Rupees 2,15,45,166/- as shown in Col.4 but due to monitory ceiling limit of 10 Lacs as per The Payment of Gratuity (Amendment) Act, 2010 , company liability is restricted to Rupees 1,28,73,977/- as Shown in Col. 5 of the above Table.
2. That the company liability has changed dramatically to Rupees 1,81,50,784/- from Rupees 1,28,73,977/- due to changes Ceiling limit of Gratuity Amount Payable to employees from "Ten Lakh Rupees" to "Twenty Lakh Rupees" by Rupees 52,76,807/- which is 40.99% of the original liability of Rupees 1,28,73,977/ at ceiling limit of 10 Lakh.
3. If the ceiling limit is abolished then the liability will be Rupees 2,15,45,166/- which is almost 167% of the original liability of Rupees 1,28,73,977/- at ceiling limit of 10 Lakh.
From above example, we may conclude that Amendments in the Act can not be regulated by the Companies similarly their impacts of such changes on their Financial Statements but Companies can smartly reduce bearing impacts of such changes in the Act by Creating a Group Gratuity Trust Fund.
Types of Group Gratuity Trust Funds
The funds of the trust can either be invested by the trustees or alternatively the funds may be let out to LIC who will then invest & give a specified return on the trust fund. The administrative work of the trust however is the responsibility of the trustees.
The identity of the trust fund is separate from that of a company and the company has no right over the money available in the fund. As the amount of gratuity payable is a function of the terminal salary and the number of years of service put in, the gratuity liability goes on increasing year after year. It is advisable to set aside each year's liability out of the profits and gains of that year.
Approval of the Income Tax Commissioner is necessary at the time of formation of the trust and whenever rules are amended.
In case of Self Managed Trust, investment of funds will have to be done as per Income-Tax Act, by the trustees and entire administration of the Trust including Actuarial Valuation will be the responsibility of the Trustees. All monies standing to the credit of the bank account to the extent not required for settlements /transfers / withdrawals etc pertaining to the members shall be invested by the Trustees in the manner prescribed by the Government of India vide Rules 101 & 67 of Income Tax Rules, 1962 from time to time.
In case of LIC managed funds of the trust, companies will get following benefits :-
(i) The job of investment and interest is paid by the Corporation on the accumulated funds.
(ii) In case of death while in service, the service period is counted while calculating the gratuity as if the person has served the company up to his Normal Retirement Date.
(iii) LIC maintains the fund under the name of trust.
(iv) Investment of funds is taken care by LIC & Interest is declared as per the performance of Total Fund and credited to the individual trust fund.
(v) At the time of exit of employee, trustee send discharge and advice LIC to make payment of Gratuity as per Scheme to the Trust.
(vi) Tax benefits are as per the provisions of the Income Tax Act, 1961. Such as contribution to LIC are treated as business expenses to the company and Interest earning are Tax Free. (Tax laws are subject to change.)
The above tax benefit as stated in (vi) above is not available to the companies who make the provision of Gratuity in their Balance Sheet as per the provisions of Accounting Standard-15 (Revised 2005) and IndAS 19.
You may also visit my blog more details : - https://groupgratuityfundconsultantindelhi.blogspot.in/
If you or your client have any requirement of of Creating Group Gratuity Fund or you looking for a experienced consultant for the above purpose then you may contact me.
(Disclaimer :-This is a personal article. Any views or opinions represented in this article are personal and belong solely to the article owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.)
Tikaram Chaudhary
Group Gratuity Trust Fund and Group Insurance Consultant
9211637063
GSTR 9 and 9C for FY 23-24 as amended by Notification 12/2024 dated 10th July 2024(with recording)
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