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This article is prepared to create awareness among-st CA's, Accounting/Finance Personnel & Management of Schools about Supreme Court Judgment dated 07.03.2019 about Eligibility of Teachers in Schools for Gratuity Benefits under the 'Payment of Gratuity Act 1972'. This article will also give information about ‘Methods for Discharging the Gratuity Liability by the Schools'.

On March 07, 2019 the Hon'able Supreme Court gave a ruling that "In the light of the amendment made in the definition of the word "employee" as defined in Section 2(e) of the Act by Amending Act No. 47 of 2009 with retrospective effect from 03.04.1997, the benefit of the Payment of Gratuity Act was also extended to the teachers from 03.04.1997 " (For this judgment you may visit at (For this judgment you may visit at With this judgment, it appears that Payment of Gratuity Act is fully applicable to Schools.


Gratuity is a statutory right of Employee whoever completes 5 years in the same Schools and is a terminal benefit. It means, Gratuity amount will be determined when monthly terminal wages of the employee are known to the Schools. The terminal wages will include Basic & Dearness allowance only. The Gratuity Benefits are calculated using the following formula:-

(15/26) multiplied by (No of Completed Years on Exit) multiplied by (Terminal Wages)

The amount is subject rupees 20,00,000/- effective from 29.03.2018.

Events when Gratuity is Payable

Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years -

(a) on his superannuation, or

(b) on his retirement or resignation, or

(c) on his death or disablement due to accident or disease:

Provided that the completion of continuous service of 5 years shall not be necessary where the termination of the employment of any employee is due to death or disablement.

Applicability of Gratuity Act on teachers

Factors affecting Quantum of Gratuity Benefits

Gratuity Benefits changes with the change in the following:-

(a) Past Service of Employee in the Company,
(b) Increase in wages of Employee in the Company,
(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in the 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,

Legal Provisions on Employer for Non Payment of Gratuity under Payment of 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 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 an 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).

Options for Discharging the Gratuity Liability

Gratuity Plan falls in the category of Defined Benefit Obligation and it increases exponentially with the increase in wages of employee and service period of the employee. Also, It is Schools responsibility to pay the gratuity to the employee in any circumstance. The School has 2 options for discharging the Gratuity Liability.


(i) Pay as go option - This option is called "Pay as go Option" and Mandatory in nature. In this option School makes provision of Gratuity Liability in Accounts by taking an Actuarial Valuation Report/Certificate from Qualified Actuary (Refer Para 49 of AS 15 - Revised 2005) for compliance of AS 15 (Revised 2005) and whenever an employee leaves the School, School pays him gratuity from his own resources.

(ii) Funding Option - In this Second Option School Management decides to Form "an irrevocable Gratuity Trust" and get approval of this gratuity trust in terms of "Part C of Fourth Schedule to Income Tax Act, 1961" from Income Tax Department. Once the approval from the Income Tax Department is received then School give contribute funds equivalent to gratuity provisions in Accounts into the Gratuity Trust annually and get tax benefits section 36 (1) (v) of the income tax act, 1961 and as and when employee leaves the organization, gratuity amount paid by the Gratuity trust.

Taxation Benefit under Accounting and Funding Option

(i) Taxation Benefits under Pay as go Option - Accounting Provisions of Gratuity Benefits shown in Financial Statements/Balance Sheet to comply with Accounting Standard 15 (Revised 2005) under Pay as you option 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."

(ii) Taxation Benefits under Funding Option - The Initial & Annual contributions made by the School in "Approved Irrevocable Trust" or in "Group Gratuity Scheme of Insurer" under Funding Option is allowed as business expense under section 36 (1) (v) of the income tax act, 1961.

"(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 Irrecovable Trust."

The author can also be reached at


Published by

Tikaram Chaudhary
(Founder of Gratuity Trust Fund Consultant)
Category Professional Resource   Report

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