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Trustees of gratuity trust

Shah Rukh (CA Aspirant) (25 Points)

09 March 2019

Can someone please help me on who can be trustees of a gratuity trust and specifically can directors of the company be trustees of the gratuity trust?Thank you.

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4 Replies

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.)

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Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 01 June 2019

1. Brief about Gratuity Benefit

As per guidelines 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 within 30 days to his employees as soon as it becomes payable.(Refer Sub Section (2) of Section 7 to the Act).

2. 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.

3. 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. The Gratuity Ceiling Limit can be raised by the employer to give additional benefits to his employees.

4. 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.

5. Impact of Increasing Wages and Length of Employment of Future payments of Gratuity

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 the annual increase in salary and increasing service period.

For Example. If Mr. A at Age 48, joins the Company where retirement Age is 60 yrs. with a Basic Pay of Rs. 2,60,000/- per month and there is a change in wages @ 10% annually, then Gratuity Payments for next 5 years and on *retirement will be:-

On Completion of 1 Yr - (15/26)* 2,86,000*1 = 1,50,000/-

On Completion of 2 Yrs - (15/26)*3,14,600*2 = 3,63,000/-

On Completion of 3 Yrs - (15/26)*3,46,060*3 = 5,98,950/-

On Completion of 4 Yrs - (15/26)*3,80,670*4 = 8,78,460/-

On Completion of 5 Yrs - (15/26)*4,18,730*5 = 12,00,788/-

On Completion of 12 Yrs - (15/26)*8,15,991*12 = 56,49,198/-*

6. Provisions for Employer under the Payment of Gratuity Act 1972 (Amended)

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

1. As soon as Gratuity becomes payable, it employers responsibility to determine the amount of gratuity and inform it to employee in writing (Refer subsection 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).

3. 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).

7. Options for Gratuity Liability Management

From point 5 & 6, it is clear that the Gratuity Liability increase exponentially with the increase in wages of employee and service period of employee. Also, it is employers responsibility to pay the gratuity to the employee in any case. Companies have generally 2 options for discharging the Gratuity Liability: -

1. Pay as go options – In this option, the employer makes provision of Gratuity Liability by taking an Actuarial Valuation Report/ Certificate from An Actuarial Service provider in Compliance of AS 15 (Revised 2005) in their Financial Statement and whenever an employee leaves the organization, the employer pays him gratuity from his own resources.

2. Funding Option – In this option, the Employer creates an irrevocable Gratuity Trust and gets the approval from Income Tax Department and contribute funds into the Gratuity Trust annually and get tax benefits section 36 (1) (v) of the income tax act, 1961 and as and when an employee leaves the organization, gratuity amount paid by the gratuity trust.

8. Why Funding Option is preferred by organizations?

Companies make provision of Gratuity liability in the balance on annually on an accrual basis based on actuarial report but it is not allowed as deduction whilst computing net Income of Income Tax (Refer Section 47A (7) of Income Tax Act 1961), So companies prefer to create Gratuity Trust. To avail the Tax Benefit under benefits section 36 (1) (v) of the income tax act, 1961 for Initial and Annual Ordinary Contribution, employer prefer Funding Option.

There are 2 major categories of Gratuity Trust, which is based on the Investment Management of the Contribution received from the organization.

(a) Self Managed Trust - In this category of Gratuity Trust, Trustee manages the investment of contribution received from the employer in the manner prescribed by the Government of India vide Rules 101 & 67 of Income Tax Rules, 1962 and earn tax-free Interest. Contribution received from the employer and interest earned from the Investment together is used to discharge the gratuity liability of employees of the organization.

(b) Insurer Managed Trust - In this category of Gratuity Trust, Trustee approach LIC or other Insurer for management the investment of contribution received from the employer. LIC or other Insurer company receive the contribution from the employer Investment is done by the LIC or other Insurer company. Few Benefits of LIC or other Insurer Managed Gratuity Trust is as under:-

(i) The job of investment and interest is paid by the LIC or other Insurer company 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. It is a special feature of LIC Managed Gratuity Fund.

(iii) LIC or other Insurer the company maintains the fund under the name of the trust.

(iv) Investment of funds is taken care by LIC or other Insurer company & 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 or other Insurer company to make payment of Gratuity as per Scheme to the Trust.

The establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise of various professionals. We have 10 years of experience in providing above Consultancy Services and We have collaboration with leading Finance Professionals, Litigation Partners, Chartered Accountants, Company Secretaries, Registered Valuers & Heads of Insurance Companies to complete the assignment. In the past 10 years, we have given Consulting Services for Gratuity Trust Formation, Gratuity & Leave Encashment Policy Restructuring and Actuarial Valuation Services to CFOs, Directors, Heads of HR, Finance and Tax Planning Department of the Companies. Our clientele is 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. The Services offered by us are as under:-

1. Consulting Services for Gratuity Trust Formation.

2. Consulting Services for Gratuity Trust Investment in Group Gratuity Schemes.

(a) Traditional Group Gratuity Schemes of LIC

(b) Unit Linked Gratuity Schemes of all Private Insurance Companies.

3. Consulting Services for Gratuity & Leave Policy Restructuring as Employee Retention Policy.

4. Consulting Services for Legal issues involved in Gratuity & Leave Encashment Policy.

5. Specialized Consulting Support Services for Registered Valuer's valuations:-

(a) Actuarial Valuations under Gratuity & Leave Encashment plan - For compliance of AS 15(R)

(b) Plant and Machinery Valuations- For compliance of AS 10

(d) Securities or Financial Assets Valuations- For Compliance of Section 42 of Companies Act

(e) Merchant Banker Valuations - For Compliance of Section 42 & 62(i)(c) of Companies Act

6. Consulting Services for Investment in Immediate & Deferred Annuities as retention benefit for highly productive employees or as a retirement benefit.

7. Consulting Services for all types of Group, General, Health insurances such as Marine Insurances, EAR Insurance, Corporate Property, Fire Insurances, etc.

In case you or your clients have a requirement for the above service then you can contact us.

Tikaram Chaudhary

Gratuity Trust Fund Formation & Compliance Valuations Consultant

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

Mobile Number : 9211637063

Email Id : tikaramchaudhary @ gmail.com & gratuityconsultant @ gmail.com,

Blog: https://gratuitytrustfundconsultant.blogspot.com

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

Linked-In 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 20 March 2020

We provide consultancy and support service to companies in following matters:-

1.   Consultancy for Formation of a New Approved Irrevocable Gratuity Trust,
2.   Consultancy for Gratuity Trust Deed, Trust Rules, Applications required for Approval of Trust,
3.   Consultancy for Approvals of Trust in terms of Part C of Schedule IV from Income Tax Department in following cases :-

a.   Approvals for New Gratuity Trust or Group Gratuity Scheme
b.   Approvals for Change in Trust Deed
c.   Approvals for Change in Trust Rules
d.   Approvals for Change in Object of Trust
e.   Approvals for Change in Trustees
f.   Approvals for winding up of Trust due to winding up of the Company
g.   Approvals for amalgamation with another fund due to merger/acquisition of the Companies

4. Consultancy for Investment of Trust Money in Group Gratuity Schemes of Insurers.

a. Traditional Group Gratuity Schemes of LIC
b. Unit Linked Gratuity Schemes of Insurance Companies

5.   Consultancy for Investment of Trust Money as per Income Tax Rules 1962..
6.   Consultancy for Litigation Issues related to Payment of Gratuity,
7.   Support Services for Actuarial Valuations required by Companies under Gratuity plan in compliance of AS 15 (Rev. 2005), IndAS 19, IAS 19-IFRS & USGAAP
8.   Support Services for Fair Value Valuations of Trust funds of Companies in compliance of IndAS-113, IndAS-36, IndAS-103, IndAS-109 IndAS-28, IndAS-38, IndAS-102 & IndAS-16.

Since annual financial statements such as Balance Sheet and Profit/ Loss Statement of your clients are at hand for the close of the financial year as on 31.03.2020, the services we deal in will be needed by many of your clients and we will be happy to provide our services if needed. In case of any clarification, you may contact me at 9211637063 or email me your queries at tikaramchaudhary @ gmail.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.