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Gratuity fund - under part c of schedule iv

Nisha (Article Assistant) (24 Points)

10 September 2012

There is a Gratuity trust whose income is exempt under section 10(25)(iv).

As per rule 12, Form ITR7 is applicable to assessees furnishing return under section 139(4A)/(4B)/(4C)/(4D).

The above graturity fund is not covered under any of the above sections.

Please advise which ITR form should be taken for filing the return.

And also whether such fund is required to file any return since its income is exempt u/s 10(25)(iv)

Thanks

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5 Replies

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 25 December 2017

Benefit of Creating Group Gratuity Trust Fund & Impact on Gratuity Liability due to change in the Ceiling limit of Gratuity Amount Payable to employees from "Ten Lakh Rupees" to "Twenty Lakh Rupees" for Companies

In this article I would like to draw your kind attention towards the benefits of creating Group Gratuity Trust Fund & Impact on Financial Statements of Companies due to change in the Ceiling limit of Gratuity Amount Payable to employees from "Ten Lakh Rupees" to "Twenty Lakh Rupees" as The Payment of Gratuity (Amendment) Bill, 2017 introduced in the Lok Sabha on 18 December 2017 for this purpose. You can access the bill by clicking on the following link:

https://www.prsindia.org/uploads/media/Payment%20of%20Gratuity%20Bill,%202017/Payment%20of%20Gratuity%20(Amendment)%20Bill,%202017.pdf

As stated above in the notice of the Bill, it proposes to substitute the words "ten lakh rupees" with the words "such amount as may be notified by the Central Government from time to time" in Sub-Section (3) to Section 4 of The Payment of Gratuity Act, 1972. Thus, the proposed Bill seeks to empower the Central Government to notify the ceiling proposed, instead of amending the said Act, so that the limit can be revised from time to time keeping in view the increase in wage and inflation, and future Pay Commissions.

If the above Bill is passed by both Houses of Parliament in the current winter session, we expect the government to notify increase in gratuity limit (to Rs. 20 Lacs) before 31 March 2018.

Impact on Gratuity Liability due to change in Gratuity Ceiling Limit

As we expect the government to notify increase in gratuity limit (to Rs. 20 Lacs) before 31 March 2018 then it will have a bearing impact on the Financial Statements of 31.03.2018 such Balance Sheet and Profit/Loss of Private Sector Companies because the Gratuity Liability of Private Sector Companies will increase many folds where employees has already accrued their gratuity benefits above 10 lakh but their accrued benefits are restricted due to ceiling of 10 lakh.

The following table this impact :-

https://2.bp.blogspot.com/-03hHGRJwJUs/Wj4adB58JHI/AAAAAAAAJdA/TZKY6fwQqYcfxgzQazONsxGIUNeeHEYmQCLcBGAs/s1600/Impact%2Bof%2BChange%2Bin%2BCeiling%2BLimit%2Bof%2BGratuity%2Bas%2Bon%2B31.03.2018.png

The above table is based on the accrued gratuity benefits by considering their accrued service till 31.03.2018 & basic salary of 31.03.2018 as qualifying salary for their Gratuity benefit computation. From results in above table, we may conclude :-

1. That the accrued liability of 20 employees for their accrued service as on 31.03.2018 for their basic salary of Rupees 13,86,536/- calculates to Rupees 2,15,45,166/- as shown in Col.4 but due to monitory ceiling limit of 10 Lacs as per The Payment of Gratuity (Amendment) Act, 2010 , company liability is restricted to Rupees 1,28,73,977/- as Shown in Col. 5 of the above Table.

2. That the company liability has changed dramatically to Rupees 1,81,50,784/- from Rupees 1,28,73,977/- due to changes Ceiling limit of Gratuity Amount Payable to employees from "Ten Lakh Rupees" to "Twenty Lakh Rupees" by Rupees 52,76,807/- which is 40.99% of the original liability of Rupees 1,28,73,977/ at ceiling limit of 10 Lakh.

3. If the ceiling limit is abolished then the liability will be Rupees 2,15,45,166/- which is almost 167% of the original liability of Rupees 1,28,73,977/- at ceiling limit of 10 Lakh.

From above example, we may conclude that Amendments in the Act can not be regulated by the Companies similarly their impacts of such changes on their Financial Statements but Companies can smartly reduce bearing impacts of such changes in the Act by Creating a Group Gratuity Trust Fund.

Types of Group Gratuity Trust Funds

The funds of the trust can either be invested by the trustees or alternatively the funds may be let out to LIC who will then invest & give a specified return on the trust fund. The administrative work of the trust however is the responsibility of the trustees.

The identity of the trust fund is separate from that of a company and the company has no right over the money available in the fund. As the amount of gratuity payable is a function of the terminal salary and the number of years of service put in, the gratuity liability goes on increasing year after year. It is advisable to set aside each year's liability out of the profits and gains of that year.

Approval of the Income Tax Commissioner is necessary at the time of formation of the trust and whenever rules are amended.

In case of Self Managed Trust, investment of funds will have to be done as per Income-Tax Act, by the trustees and entire administration of the Trust including Actuarial Valuation will be the responsibility of the Trustees. All monies standing to the credit of the bank account to the extent not required for settlements /transfers / withdrawals etc pertaining to the members shall be invested by the Trustees in the manner prescribed by the Government of India vide Rules 101 & 67 of Income Tax Rules, 1962 from time to time.

In case of LIC managed funds of the trust, companies will get following benefits :-

(i) The job of investment and interest is paid by the Corporation on the accumulated funds.

(ii) In case of death while in service, the service period is counted while calculating the gratuity as if the person has served the company up to his Normal Retirement Date.

(iii) LIC maintains the fund under the name of trust.

(iv) Investment of funds is taken care by LIC & Interest is declared as per the performance of Total Fund and credited to the individual trust fund.

(v) At the time of exit of employee, trustee send discharge and advice LIC to make payment of Gratuity as per Scheme to the Trust.

(vi) Tax benefits are as per the provisions of the Income Tax Act, 1961. Such as contribution to LIC are treated as business expenses to the company and Interest earning are Tax Free. (Tax laws are subject to change.)

The above tax benefit as stated in (vi) above is not available to the companies who make the provision of Gratuity in their Balance Sheet as per the provisions of Accounting Standard-15 (Revised 2005) and IndAS 19.

You may also visit my blog more details : - https://groupgratuityfundconsultantindelhi.blogspot.in/

If you or your client have any requirement of of Creating Group Gratuity Fund or you looking for a experienced consultant for the above purpose then you may contact me.

(Disclaimer :-This is a personal article. Any views or opinions represented in this article are personal and belong solely to the article owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.)

Tikaram Chaudhary
Group Gratuity Trust Fund and Group Insurance Consultant
9211637063

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Tejas Sant (Practicing Chartered Accountant) (68 Points)
Replied 09 May 2019

Hello Mr.Tikaram Chowdhary,

We have an approved Gratuity fund from IT Department as per Schedule VI and the same is run by LIC. Like you said we pay certain premium and take the same as Business expenditure.

Now we wish to withdraw this Gratuity Fund from LIC and wish to proceed ahead. LIC asks for Approval from Income Tax Department but as per IT Department approval for withdrawal can only be provided in case of Winding of Company or Amalgamantion with another fund.

Request you to please through some light and guide me with your expert advice regarding this issue.

Many Thanks in Advance.

CA Tejas Sant

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 25 May 2019

Why Approval Of Gratuity Fund From Income Tax Department Is Compulsory?

Brief about Gratuity & its applicability

Gratuity being an important retirement benefit to employees in the Indian context is relevant for all organizations (i.e. MNC's, Schools and Other business entities) having more than 10 employees. Since an employee sacrifices he prime time of his life for the development, prosperity, and betterment of his employer, the employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.

Determination of Gratuity Amount

The amount of Gratuity payable to an employee on his exit from service, according to “The Payment of Gratuity (Amendment) Act 2018 ”, in force at present, is:-

(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

This is subject to a ceiling limit of 20,00,000/- effective from 29.03.2018. Gratuity can be paid over and above 20,00,000/- also.

Conditions for payment of Gratuity

Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:

(a) On his superannuation
(b) On his resignation
(c) On his death or disablement due to employment injury or disease.

In the case of (c) vesting condition of 5 years does not apply.

Factors contributing exponential increase in amount of Gratuity

Gratuity is a statutory right of employee whoever completes 5 years in the same organization and the cost of Gratuity is to be borne by the Organization and not by an employee. Gratuity is a defined benefit in nature and it increases nearly exponentially with the changes following:-

(a) Past Service of Employee,
(b) Increase in wages of Employee,
(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in 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.
(f) Change in the applicability of compulsory insurance for Gratuity by *State Governments due to amendment in the act.

(State of Andhra Pradesh notified about the compulsory insurance for Gratuity under Andhra Pradesh Compulsory Gratuity Insurance Rules, 2011vide Lr.No. M1/8842/2010, dated: 04.12.2010 from the Commissioner of Labour, Andhra Pradesh and remains un-notified for rest of India).

*Applicability of compulsory insurance for Gratuity can be notified by the other State Governments because compulsory insurance of gratuity secures the gratuity benefits of an employee even in case of bankruptcy of the Organization.

Employers liability for Payment of Gratuity under the Act

Section 7 of the Act has kept obligation for payment of gratuity act on the shoulders of the employer, few provisions of this section act are listed below:-

1. As soon as Gratuity becomes payable, it employers responsibility to determine the amount of gratuity and inform it to the employee in writing (Refer Sub Section 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 available for Gratuity Liability Management

Organizations have 2 options for management of Gratuity Liability :-

1. Provisioning of Gratuity Liability on the accrual basis in their balance sheet at the end of each financial year.
2. Creating an Irrevocable Gratuity Trust and contributing 8.33% of annual basic remunerations into Gratuity Trust

Why Funding Option is preferred and Approval Gratuity Fund is required

Companies make provision of Gratuity liability in the balance on annually on accrual basis based on actuarial report but it is not allowed as deduction whilst computing net Income of Income Tax (Refer Section 47A (7) of Income Tax Act 1961), So companies prefer to create Trust , and make initial and annual contribution into Trust and Gratuity Fund is formed.

The Initial and Annual contribution made by the companies into Gratuity Fund is allowed as expense under Section 36(1)(v) of Income Tax Act, 1961, which reads as under :-

“any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust”

The interest earned by an approved Gratuity Fund is also tax free under Section 10(25)(iv) Income Tax Act, 1961. which reads as under :-

"any income received by the trustees on behalf of an approved gratuity fund"

The above tax benefits are available to the company, when approval of Gratuity Fund from Income Tax Department under Part C of Schedule IV of Income Tax Act 1961 is received.

The establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise. I have a team-leading Professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies having decades of experience in providing their services to our clients spread in all sectors of the Indian Economy, in the Public & Private Sectors which covers areas of Manufacturing, Software, Technology, Electricity, Electronics, Call Centers, Banks, Educational Institutes, Schools, Universities, Hotels, Hospitals, Hospitality Companies, etc. etc.
I offer paid online/offline consultation for the following services:-

1. Consultation for the Formation of an Approved Gratuity Fund,
2. Consultation for Approval of Gratuity Trust from Authority,
3. Consultation for Gratuity Fund Investment in Group Gratuity Schemes of LIC, SBI and Bharati Axa,
4. Consultation for Employee Benefit Valuation, Merchant Banker Valuations,
5. Consultation for Retirement Investment in Immediate/deferred Annuity Schemes,
6. Consultation for Employee Retention Schemes,
7. Consultation for Employer-Employee and Key-Man Insurance Scheme,
8. Consultation for Group Insurances

Tikaram Chaudhary
Head Consultant
(Experienced Consultant with 10 years of exposure in assessment/valuations of Employees Benefit Liabilities specially Gratuity/Leave Encashment Liabilities & Long Service Award Schemes)
Gratuity Fund Trust Consultant
Office Address : R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi – 110059
Mobile Number: 9211637063
Email ID - tikaramchaudhary @ gmail.com, gratuityconsultant @ gmail.com
Linkedin Profile: https://www.linkedin.com/in/tikaram-chaudhary-a5727848
Blog : https://gratuityconsultant.blogspot.com
Website: https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/?m=true
(Please note that my telephonic/online consultation charges need to be paid by you in advance)

(All Consultancy Services provided by us are subject to terms & conditions will be stated when a consultation job is accepted.)

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 01 June 2019

1. Brief about Gratuity Benefit

As per guidelines of The Payment of Gratuity Act 1972 (Amended) gratuity is a statutory obligation on the shoulders of the employer to make the payment of Gratuity within 30 days to his employees as soon as it becomes payable.(Refer Sub Section (2) of Section 7 to the Act).

2. Applicability

Compliance of this act is applicable to all organizations such as a factory, mine, oilfield, port, railways, plantation, shops, establishments or Educational institution having 10 or more employees on any day in the preceding 12.

3. Determination of Gratuity Amount

The amount of Gratuity payable to an employee on his exit from service, according to “The Payment of Gratuity (Amendment) Act 2018 ”, in force at present, is:-

(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

This is subject to a ceiling limit of 20,00,000/- effective from 29.03.2018. The Gratuity Ceiling Limit can be raised by the employer to give additional benefits to his employees.

4. Conditions for payment of Gratuity

Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:

(a) On his superannuation

(b) On his resignation

In the case of (c) vesting condition of 5 years does not apply.

5. Impact of Increasing Wages and Length of Employment of Future payments of Gratuity

Gratuity Benefits depends upon last drawn monthly wages and is linked to the length of service, normally it goes on increasing from the time when the employee joins service and the time of his exit from service due to the annual increase in salary and increasing service period.

For Example. If Mr. A at Age 48, joins the Company where retirement Age is 60 yrs. with a Basic Pay of Rs. 2,60,000/- per month and there is a change in wages @ 10% annually, then Gratuity Payments for next 5 years and on *retirement will be:-

On Completion of 1 Yr - (15/26)* 2,86,000*1 = 1,50,000/-

On Completion of 2 Yrs - (15/26)*3,14,600*2 = 3,63,000/-

On Completion of 3 Yrs - (15/26)*3,46,060*3 = 5,98,950/-

On Completion of 4 Yrs - (15/26)*3,80,670*4 = 8,78,460/-

On Completion of 5 Yrs - (15/26)*4,18,730*5 = 12,00,788/-

On Completion of 12 Yrs - (15/26)*8,15,991*12 = 56,49,198/-*

6. Provisions for Employer under the Payment of Gratuity 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 this section act are listed below:-

1. As soon as Gratuity becomes payable, it employers responsibility to determine the amount of gratuity and inform it to 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).

7. Options for Gratuity Liability Management

From point 5 & 6, it is clear that the Gratuity Liability increase exponentially with the increase in wages of employee and service period of employee. Also, it is employers responsibility to pay the gratuity to the employee in any case. Companies have generally 2 options for discharging the Gratuity Liability: -

1. Pay as go options – In this option, the employer makes provision of Gratuity Liability by taking an Actuarial Valuation Report/ Certificate from An Actuarial Service provider in Compliance of AS 15 (Revised 2005) in their Financial Statement and whenever an employee leaves the organization, the employer pays him gratuity from his own resources.

2. Funding Option – In this option, the Employer creates an irrevocable Gratuity Trust and gets the approval from Income Tax Department and contribute funds into the Gratuity Trust annually and get tax benefits section 36 (1) (v) of the income tax act, 1961 and as and when an employee leaves the organization, gratuity amount paid by the gratuity trust.

8. Why Funding Option is preferred by organizations?

Companies make provision of Gratuity liability in the balance on annually on an accrual basis based on actuarial report but it is not allowed as deduction whilst computing net Income of Income Tax (Refer Section 47A (7) of Income Tax Act 1961), So companies prefer to create Gratuity Trust. To avail the Tax Benefit under benefits section 36 (1) (v) of the income tax act, 1961 for Initial and Annual Ordinary Contribution, employer prefer Funding Option.

There are 2 major categories of Gratuity Trust, which is based on the Investment Management of the Contribution received from the organization.

(a) Self Managed Trust - In this category of Gratuity Trust, Trustee manages the investment of contribution received from the employer in the manner prescribed by the Government of India vide Rules 101 & 67 of Income Tax Rules, 1962 and earn tax-free Interest. Contribution received from the employer and interest earned from the Investment together is used to discharge the gratuity liability of employees of the organization.

(b) Insurer Managed Trust - In this category of Gratuity Trust, Trustee approach LIC or other Insurer for management the investment of contribution received from the employer. LIC or other Insurer company receive the contribution from the employer Investment is done by the LIC or other Insurer company. Few Benefits of LIC or other Insurer Managed Gratuity Trust is as under:-

(i) The job of investment and interest is paid by the LIC or other Insurer company on the accumulated funds.

(ii) In case of death while in service, the service period is counted while calculating the gratuity as if the person has served the company up to his Normal Retirement Date. It is a special feature of LIC Managed Gratuity Fund.

(iii) LIC or other Insurer the company maintains the fund under the name of the trust.

(iv) Investment of funds is taken care by LIC or other Insurer company & Interest is declared as per the performance of Total Fund and credited to the individual trust fund.

(v) At the time of exit of employee, trustee send discharge and advice LIC or other Insurer company to make payment of Gratuity as per Scheme to the Trust.

The establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise of various professionals. We have 10 years of experience in providing above Consultancy Services and We have collaboration with leading Finance Professionals, Litigation Partners, Chartered Accountants, Company Secretaries, Registered Valuers & Heads of Insurance Companies to complete the assignment. In the past 10 years, we have given Consulting Services for Gratuity Trust Formation, Gratuity & Leave Encashment Policy Restructuring and Actuarial Valuation Services to CFOs, Directors, Heads of HR, Finance and Tax Planning Department of the Companies. Our clientele is spread in all sectors of the Indian Economy, in the Public & Private Sectors which covers areas of Manufacturing, Software, Technology, Electricity, Electronics, Call Centers, Banks, Educational Institutes, Schools, Universities, Hotels, Hospitals, Hospitality Companies, etc. etc. The Services offered by us are as under:-

1. Consulting Services for Gratuity Trust Formation.

2. Consulting Services for Gratuity Trust Investment in Group Gratuity Schemes.

(a) Traditional Group Gratuity Schemes of LIC

(b) Unit Linked Gratuity Schemes of all Private Insurance Companies.

3. Consulting Services for Gratuity & Leave Policy Restructuring as Employee Retention Policy.

4. Consulting Services for Legal issues involved in Gratuity & Leave Encashment Policy.

5. Specialized Consulting Support Services for Registered Valuer's valuations:-

(a) Actuarial Valuations under Gratuity & Leave Encashment plan - For compliance of AS 15(R)

(b) Plant and Machinery Valuations- For compliance of AS 10

(d) Securities or Financial Assets Valuations- For Compliance of Section 42 of Companies Act

(e) Merchant Banker Valuations - For Compliance of Section 42 & 62(i)(c) of Companies Act

6. Consulting Services for Investment in Immediate & Deferred Annuities as retention benefit for highly productive employees or as a retirement benefit.

7. Consulting Services for all types of Group, General, Health insurances such as Marine Insurances, EAR Insurance, Corporate Property, Fire Insurances, etc.

In case you or your clients have a requirement for the above service then you can contact us.

Tikaram Chaudhary

Gratuity Trust Fund Formation & Compliance Valuations Consultant

Office Address: R 11, F/F, R Block, Vikas Nagar, New Delhi -110059

Mobile Number : 9211637063

Email Id : tikaramchaudhary @ gmail.com & gratuityconsultant @ gmail.com,

Blog: https://gratuitytrustfundconsultant.blogspot.com

Website: https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/

Linked-In Profile: https://www.linkedin.com/in/tikaram-chaudhary-a5727848/

(All Consultancy Services provided by us are subject to terms & conditions will be stated when a consultation job is accepted.)

Bommireddy Nagendra reddy (2 Points)
Replied 12 May 2021

Which return have to file and is it mandatory to submit Financial statements to Income tax department ? Please any one suggest me , what is the procedure and How to file an icome tax return to part c of schedule iv?