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Group Gratuity Scheme

 

Gratuity is a statutory liability of most of the employers which accrues to an employee for every year of service put in by him.

 

Under the Payment of Gratuity Act, 1972, every employer employing more than 10 persons must pay 15 days salary (15/26 of a month's wages) for every completed year’s service to each of his employees on their exit after five years of continuous service subject to maximum limit of Rs. 10 lacs currently specified by the Income Tax Act.

 

Higher benefits can be paid if the employer so desires. Gratuity payable to the employees can be paid as and when liability arises and can be claimed as deductable expense under P & L A/c of the relevant financial year. However, the sound system of financial management envisages providing for Gratuity liability every year and claiming the tax benefits as it is mandatory as per Accounting Standards 15 (AS15) to account for the liability on Actual basis. This can be done by creating a Trust which takes care of the gratuity liability. 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, the job of investment and actuarial valuation is taken over by the corporation and interest is paid by the Corporation on the accumulated funds. LIC also provides Notional Death Benefit through a group insurance policy for which premium is paid by the company. 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.

 

The contribution required to fund the past service liability on the date of formation of the trust is know as the “Initial Contribution”. The past service liability can be funded either as a bullet payment or in five installments. Whether paid in single or multiple installments the whole of payment will be eligible for tax relief in the year of payment.

 

“Ordinary Contribution” is an amount certified by the Actuary and approved by the Company, in respect of each member in the employment of the Company, payable in annually or in one or two installments and shall not generally exceed the maximum permitted under the Income Tax Rules, 1962, as allowable deduction, which at present is 8.33 % of each member's pay for each year of his past service with the Company.

 

No individual account of a member is maintained, as the liability is that of the employer and imposed on him by statute only a pooled fund is maintained.

 

A member can nominate one or more persons (stating specifically the individual share of each nominee) from the immediate family by application to the Trustees the right to receive the amount of gratuity in the event of his death, before the amount becomes payable, or having become payable, has not been paid.

 

HOW IS THE SCHEME INSTALLED?

The steps to be taken by the employee for installing the Scheme are :

 

(i) To draft the Trust Deed and Rules, to execute the Trust Deed, and to appoint Trustees for administering the scheme.

(ii) To send application to the Commissioner of Income-Tax for approval under Part C of the Fourth Schedule of the Income-Tax Act 1961.

 

LEGAL AND TAXATION ASPECTS

 

The provisions relating to approved Gratuity Funds are set out in Part 'C' of the Fourth Schedule of the Income-Tax Act, 1961 and part XIV of the Income-tax Rules , 1962.

 

 

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