Unpaid gratuity and interest earned

This query is : Resolved

Rajkumar Gutti (Querist)
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14 March 2025 We maintain Employee Gratuity Trust account in bank. LIC credited gratuity amount in our Bank trust account.
In gratuity trust bank account unclaimed or un paid huge amount lies from 8 years. In that gratuity trust account bank interst credited.
Now we want to transfer interest earned amount to our business bank account and to show int. income.
Is it right method, if no, then what treatment to be done.

Pl. Guife

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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12 August 2025 Context:
You have a Gratuity Trust Account where funds are deposited for employee gratuity liability.

The bank credits interest income on the trust account balance.

Some gratuity amounts are unpaid/unclaimed for a long time.

You want to transfer the interest earned from the trust account to your business account and recognize it as income.

Key points & recommended treatment:
1. Interest earned on Gratuity Trust Account:
The interest earned belongs to the gratuity fund, not the company’s business income.

It should remain in the gratuity fund account and cannot be transferred to the business bank account directly as business income.

This interest helps to build the gratuity fund and meet future obligations.

Recognizing it as income in your business books is not correct because it is not the company’s income but the trust’s income.

2. Accounting for interest income in Gratuity Trust:
Pass an entry within the trust accounts to record interest income credited by the bank.

Journal Entry in Trust books:

Particulars Debit Credit
Bank Account (Gratuity Trust) XXXX (Interest amount)
To Interest Income (Gratuity Fund) XXXX

This shows the interest income as part of the trust fund, increasing the fund balance.

3. Unpaid / unclaimed gratuity:
The liability for unpaid gratuity remains on your company’s books until paid.

The trust holds funds to meet this liability.

You should continue to show gratuity liability in your books and track the trust funds separately.

The trust’s funds (including interest) are earmarked for employees' gratuity.

4. Transferring funds to business bank account:
Transferring interest earned to your company’s business account is not advisable and can create accounting and compliance issues.

The trust funds and income must be kept separate.

If you withdraw funds from the trust for purposes other than payment to employees, it could lead to legal issues and scrutiny by tax authorities.

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