PROVISION FOR GRATUTY
This query is : Resolved
02 December 2025
The employer has not provided for gratuity in books of accounts. What are the consequences under different laws including companies act
02 December 2025
If an employer fails to provide for gratuity in the books, it can lead to statutory non-compliance under the Payment of Gratuity Act, 1972, accounting violations under the Companies Act, 2013, and audit qualifications under AS 15/Ind AS 19. This exposes the company to penalties & litigation risk.
02 December 2025
Payment of Gratuity Act, 1972
- Mandatory obligation: Employers must pay gratuity to employees completing 5 years of service.
- Failure to provide liability in books does not absolve payment obligation. Employees can claim gratuity directly, and courts/authorities will enforce payment.
- Penalties:
- Imprisonment up to 6 months or fine up to ₹10,000 for default.
- Continuous default may attract further prosecution.
- Risk: Liability will accumulate unrecorded, creating sudden cash outflow when employees retire/resign.
- Mandatory obligation: Employers must pay gratuity to employees completing 5 years of service.
- Failure to provide liability in books does not absolve payment obligation. Employees can claim gratuity directly, and courts/authorities will enforce payment.
- Penalties:
- Imprisonment up to 6 months or fine up to ₹10,000 for default.
- Continuous default may attract further prosecution.
- Risk: Liability will accumulate unrecorded, creating sudden cash outflow when employees retire/resign.
02 December 2025
Companies Act, 2013
- Section 129: Financial statements must present a true and fair view and comply with accounting standards.
- Section 133: Requires compliance with notified Accounting Standards (AS 15 or Ind AS 19).
- Non-provision = Misstatement:
- Gratuity is a defined benefit obligation. Not recording it violates accounting standards.
- Auditors may issue a qualified/adverse opinion in audit reports.
- Director liability: Under Section 134, directors must certify compliance. False certification can attract penalties.
- Possible consequences:
- Regulatory scrutiny from MCA.
- Investor distrust due to misstated liabilities.
- Section 129: Financial statements must present a true and fair view and comply with accounting standards.
- Section 133: Requires compliance with notified Accounting Standards (AS 15 or Ind AS 19).
- Non-provision = Misstatement:
- Gratuity is a defined benefit obligation. Not recording it violates accounting standards.
- Auditors may issue a qualified/adverse opinion in audit reports.
- Director liability: Under Section 134, directors must certify compliance. False certification can attract penalties.
- Possible consequences:
- Regulatory scrutiny from MCA.
- Investor distrust due to misstated liabilities.
02 December 2025
- Requirement: Gratuity liability must be recognized based on actuarial valuation.
- If omitted:
- Expenses understated, profits overstated.
- Balance sheet liabilities understated.
- Audit impact: Auditors will insist on disclosure and may flag non-compliance in CARO reporting.
- If omitted:
- Expenses understated, profits overstated.
- Balance sheet liabilities understated.
- Audit impact: Auditors will insist on disclosure and may flag non-compliance in CARO reporting.
02 December 2025
Income Tax Act, 1961
- Deduction allowed only if provision is made through an approved gratuity fund.
- If no provision is recorded, employer loses tax benefits.
- Payments made directly at retirement are deductible only in that year, not earlier.
- Impact: Higher taxable profits in interim years.
Labour Codes (Social Security Code, 2020 – effective 2025)
- Expanded coverage: Fixed-term employees eligible after 1 year.
- Accounting impact: Immediate recognition of past service cost under Ind AS 19.
- Failure to provide: Larger liability shock when enforced, with penalties for non-compliance.
- Deduction allowed only if provision is made through an approved gratuity fund.
- If no provision is recorded, employer loses tax benefits.
- Payments made directly at retirement are deductible only in that year, not earlier.
- Impact: Higher taxable profits in interim years.
Labour Codes (Social Security Code, 2020 – effective 2025)
- Expanded coverage: Fixed-term employees eligible after 1 year.
- Accounting impact: Immediate recognition of past service cost under Ind AS 19.
- Failure to provide: Larger liability shock when enforced, with penalties for non-compliance.
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