Gratuity payment accounting

This query is : Resolved

ramaswamy s tarikere (Querist)
Follow

18 December 2012 A company's staff gratuity is being managed by LIC. Pl clarify on the whether payment made to LIC, balance in the fund should be shown in the books of the Company ?

2. Whether Gratuity Trust creation is a must. What transactions are to pass through the Trust Accounts.

Arun Biyani

Arun Biyani (Expert)
Follow

18 December 2012

Yes, it is mandatory to create a gratuity trust. For this, you have to make a trust deed, a board resolution from top management, appointment of trustee and then you have to approach income tax commissioner of your concerned area and you need to submit the trust deed.
Income Tax commissioner after due scrutiny will issue a gratuity trust formation certificate. On the basis of this, you have to open a bank account on Gratuity Trust name and you can approach LIC.

also the fund with LIC is not balance sheet item as the Contribution paid to the trust fund by an employer is treated as an business expenses. (Sec 36 (1)(v)) and interest earned on the same is exempt, therefore you need to take this balance in your profit and loss as expenses.

ramaswamy s tarikere

ramaswamy s tarikere (Querist)
Follow

19 December 2012 Many Thanks. But in case where it is the 5th year of payment to LIC and no trust is formed then how to proceed. Rgs. TSR

Arun Biyani

Arun Biyani (Expert)
Follow

19 December 2012 it is statutory obligation of employer towards employee, if the fund is in the name of company they may use it for some other purpose and when required, company may not be in a position to make the required payment. still i am not sure if you are doing this with LIC and not suggested by them to create trust, pl check your past records as i found LIC very supportive for gratuity matter. Still if you have not created trust, create the trust now, request LIC to transfer the policy on trust name, creat a separate bank account in the name of trust, make your company cotrinution to trust account henceforth and when the payment will be due to any employee you should claim this from LIC, they will issue the cheque in the name of trust and then trust will pay the amount to the employees. Pl note that under income tax the contribution towards gratuity is allowed as expenses only if its made to approved gratuity fund, and income tax approves only fund set up under irrevocable registered trust, therefore its necessary to create trust and then get approval from income tax for allowance of expenses.

ramaswamy s tarikere

ramaswamy s tarikere (Querist)
Follow

21 December 2012 Many thanks. we shall follow. Regards. TSR

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now