Gratuity fund withdrawal from LIC

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Query on withdrawal and switching of LIC gratuity fund by a company trust created in FY 2016-17. It was clarified that the trust should first obtain Income Tax approval to be treated as an approved gratuity trust before withdrawal or transfer. Proper approval is required for compliance and tax treatment clarity.

Sandip Makadiya

Sandip Makadiya (Querist)

14 February 2025 Dear Experts,

ABC Pvt. Ltd. (Company) has setup Gratuity Trust in FY 2016-17 and started gratuity investment with LIC. At that time, LIC informed to Company that they just need to intimate Income Tax department and don’t need any other approval.

Company has further started another manufacturing plant Gratuity Trust investment with another private Company.

So, in current situation, Company has Gratuity Trust Deed & PAN, but don’t have any approval of Income Tax Department. They just have intimated to Income tax department in FY 2016-17

Now in FY 2024-25, Company wants to switch to other Company by way of withdrawing funds from LIC, because of higher interest rate and other benefits.

Now for withdrawal of fund from LIC, LIC is asking for permission of income tax department. My questions are:

1. What is the process to obtain permission from the Income Tax Department for withdrawing funds from LIC?
2. What will be tax implication on withdrawal of funds from LIC?
3. Since the company only intimated the Income Tax Department in FY 2016-17 and did not obtain approval, does the existing Gratuity Trust qualify as an "Approved Gratuity Trust" under the Income Tax Act, 1961?
4. Are there any potential penalties, interest, or disallowances under the Income Tax Act due to the lack of prior approval for the gratuity trust investment?
5. Will the withdrawal and transfer of gratuity funds impact the tax treatment of past gratuity contributions made by the company?

Your guidance needed.

Regards,
Sandip

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

15 February 2025 See the link for information.
https://www.easyaccounting.co.in/gratuity-trust-registration-in-income-tax/

Sandip Makadiya

Sandip Makadiya (Querist)

15 February 2025 Dear Sir,

Thank you for your reply.

But from this article, I still have some queries unsolved:

1. What is the process to obtain permission from the Income Tax Department for withdrawing funds from LIC?
2. What will be tax implication on withdrawal of funds from LIC?
3. Can we take approval for the trust created in FY 2016-17?

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

15 February 2025 First get approval of the trust.
See the link.
https://www.ascgroup.in/employee-gratuity-trust-formation-and-compliances/

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