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Whether actual gratuity expense is allowed in income tax

Salman PS (STUDENT) (72 Points)

24 April 2016

Whether actual gratuity expense is allowed as per income tax act,if yes under which section

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9 Replies

Tribhuvan Aditya Singh (Student as well as Self-employed) (3710 Points)
Replied 24 April 2016

if it has not been allowed previously for any prov. made in this regard then it can be allowed as an expense.

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Sandeep Sankaran (Chartered Accountant) (128 Points)
Replied 25 April 2016

provision made for gratuity is disallowed u/s 40A(7). if during the year any gratuity has actually been paid, then such amount actually paid shall be allowed as deduction.

Tribhuvan Aditya Singh (Student as well as Self-employed) (3710 Points)
Replied 25 April 2016

@ sandeep.. sec 40A(7) also says that if prov. is made for payment of any contribution towards an approved gratuity fund then it is allowed as deduction.

Sandeep Sankaran (Chartered Accountant) (128 Points)
Replied 25 April 2016

but then section 43B comes in and allows only the amount which is actually paid.

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Tribhuvan Aditya Singh (Student as well as Self-employed) (3710 Points)
Replied 25 April 2016

yes, but it means that prov. for such contribution should actually be paid whereas the actual liab. of gratuity payment will be in future.
so in a way that prov. has been allowed even if the actual gratuity has not been paid.

Sandeep Sankaran (Chartered Accountant) (128 Points)
Replied 25 April 2016

dear tribhuvan,
kindly note that in case of contribution to gratuity fund, at the time of retirement, gratuity will be paid out of that fund and not by the employer. in that case there is no question of claiming deduction.

Tribhuvan Aditya Singh (Student as well as Self-employed) (3710 Points)
Replied 25 April 2016

yes, you are correct. and that is what i said previously. may be i wasnt clear that enough but i meant the same thing.

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Salman PS (STUDENT) (72 Points)
Replied 26 April 2016

But, whether 43B is whether applicable for gratuity payment in normal case other than where it is payable to the employee actually and not paid before date under 139

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 21 April 2019

I hope the below write-up may help you in understanding requirement for “Formation of an approved Gratuity Trust”

Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. MNC's, Schools and Other business entities) having more than 10 employees . Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.

Gratuity Benefit falls in the category of “Defined Benefits” & amount of Gratuity payable to an employee on his exit from service, according to “ Payment of Gratuity Act 1972”, 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/-.

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
(c) On his death or disablement due to employment injury or disease.

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

Gratuity is a statutory right of employee whoever completes 5 years in the same organization and the cost of Gratuity is to be borne by the Organization and not by an employee. Gratuity is a defined benefit nature and it Increases with the increase/changes in following:-

(a) Past Service of Employee,
(b) Increase in wages of Employee,
(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in Act,
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act &
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act.
(f) Change in applicability of compulsory insurance for Gratuity by State Governments due amendment in the act. (State of Andhra Pradesh notified about the compulsory insurance for Gratuity under Andhra Pradesh Compulsory Gratuity Insurance Rules, 2011vide Lr.No.M1/8842/2010, dated: 04.12.2010 from the Commissioner of Labour, Andhra Pradesh and remains un-notified for rest of India).

Applicability of compulsory insurance for Gratuity can be notified by the other State Governments because compulsory insurance of gratuity secures the gratuity benefits of employee even in case of bankruptcy of the company.

For the purpose of Accounting of gratuity benefits, Companies makes provision of Gratuity on accrual basis in their balance sheet to comply with the requirement of Accounting Standards issued by the Institute of Chartered Accountants of India. Compliance of these standards (i.e. AS 15 Revised 2005 and IndAS 19) is mandatory in nature. Generally services of an Actuary is taken for preparation of actuarial report under Gratuity Plan for compliance of AS 15 Revised 2005 and Ind AS 19 by the company’s annual basis at the end of each financial year.

Gratuity provision made in the balance sheet only suffice the requirement for compliance of Accounting Standard 15 (Revised 2005) but it is not allowed as deduction (Refer Section 47A (7) of Income Tax Act 1961)

For achieving the tax benefits under Section 36(1)(v) for contribution of gratuity equivalent to gratuity provision in the balance sheet based on actuarial report (Refer Circular : No. 30(XLVII-18), dated 30-11-1964 for clarification for Rule 103 for Initial Contribution of Income Tax Rules 1962), companies requires to create an approved Gratuity Trust.

Section 36(1)(v) of Income Tax Act, 1961 reads as under :-

“any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust”

An approved gratuity trust investment is either “Self Managed by the Trustee” or “Managed by the Insurance Company”.

The establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise. I have a team-leading Professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies having decades of experience in providing their services to our clients 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.

I offer paid online/offline consultation for the following services:-

1.   Consultation for Complete Guidance for formation An Approved Irrevocable Gratuity Trust,
2.   Consultation for Documentation required for approval of Gratuity Trust from Authority,
3.   Consultation for Group Gratuity Schemes of LIC, SBI and Bharati Axa,
4.   Consultation for preparation of Inputs for Employee Benefit Valuations,
5.   Consultation for Retirement Investment in Immediate/deferred Annuity Schemes,
6.   Consultation for Employee Retention Schemes,
7.   Consultation for Employer-Employee and Key-Man Insurance Scheme,
8.   Consultation for Group Insurances

(Please note that my 50% telephonic/online consultation charges needs to be paid by you in advance)

Tikaram Chaudhary

Head Consultant
(Experienced Consultant with 10 years of exposure in assessment/valuations of Employees Benefit Liabilities specially Gratuity/Leave Encashment Liabilities & Long Service Award Schemes)
Gratuity Fund Trust Consultant
Office Adderess : R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi – 110059
Mobile Number: 9211637063
Email ID - tikaramchaudhary @ gmail.com, gratuityconsultant @ gmail.com
Linkedin Profile: https://www.linkedin.com/in/tikaram-chaudhary-a5727848
Blog:https://gratuitytrustfundconsultantindelhincr.blogspot.com, https://gratuityconsultant.blogspot.com
Website: https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/?m=true

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