Hi,
I am registering the gratutiy trust and i want to avail income tax exemption under section 25 part C ( approved gratuity trust )
Kindly can anyone help me with the application for availing such exemption
also kindly guide me the process for the same (Trust is already having its account with LIC)
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
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 prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.
Gratuity Benefit falls in the category of “Defined Benefits” & amount of Gratuity payable to an employee on his exit from service, according to “ Payment of Gratuity Act 1972”, in force at present, is :-
(Salary 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 10,00,000/-. Which is likely to raised from 10,00,000/- to 20,00,000/-.
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 case of (c) vesting condition of 5 years does not apply.
Gratuity Benefits depends upon last drawn monthly wages and is linked to 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 annual increase in salary and increasing service period.
Let us take an example of employee and understand the Impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Benefits payable to him on his date of retirement. The particulars of employee are as under :-
Name of Employee - Mr. Bhanu Pratap
Date of Birth - 31.03.1984
Date of Joining - 31.03.2007
Date of Retirement - 31.03.2044
Basic Salary - 5200/-
Retirement Age - 60 Years
Increment Rate - 8% p.a.
Calculation of Gratuity Payable on 31.03.2017
Age on 31.03.2017 - 33 yrs.
Completed years of Service - 10 yrs.
Remaining Service Period up to Retirement- 27 yrs.
Gratuity Factor - 15/26
Ceiling Limit on Gratuity - 10,00,000/-
Gratuity Payable on 31.03.2017 = (15/26) x No of Completed years of Service Up to 31.03.2017 x Basic Salary
= (15/26) x 10 x 5200
= 30,000/-
Calculation of Gratuity Payable on Retirement assuming there is no change in ceiling limit and benefit formula of Gratuity Payment.
Completed years of Service till Retirement - 37 yrs.
Expected Salary on Retirement - 41,538/-
Gratuity Factor - 15/26
Ceiling Limit on Gratuity - 10,00,000/-
Gratuity Payable on retirement = (15/26) x No of Completed years of Service Up to retirement x Expected Basic Salary with annual increment of 8%.
= (15/26) x 37 x 41538
= 8,86,675/-
From above example it is clear that there is a bearing impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Payable to employee on 31.03.2017 and on his retirement. If we calculate the impact from the above example, Gratuity payable to Mr. Bhanu Pratap on Retirement @ a increased salary of 8% p.a. compounded with his increased service period up to retirement is 8,86,675/- which is 29.55 times the Gratuity Payable to him on 31.03.2017 (i.e. 30,000/-).
As stated above, Gratuity Benefits Payable to employees in future years has a bearing Impact of Annual Increase in Salary and Increasing Service Period, hence it is advisable to Organisations (MNC's, Schools, Private Universities, Private Companies) to do early strategic financial planning to mitigate the effect of "Annual Increase in Salary and Increasing Service Period"
To know more details/Tax benefits available to organisation after creating a Gratuity Trust Fund, you may visit our blog at https://gratuitytrustfund.blogspot.in. You may also send your requirement at our email address - tikaramchaudhary @ gmail.com or call us at 9211637063 for your query.
Dear Sir,
We have created a Gratuity Trust and Fund invested in LIC and paying premium annually. Kindly suggest us what should we take steps for goring forward for getting incometax exemption. Please suggest.
We need to Visit any Income Tax office to apply for exemption, if yes please for us the format for the same.
Gratuity benefits are governed by "The Payment of Gratuity Act 1972" and paid by the Company to an employee in addition to his salary on exit from the company. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal. It means, Gratuity amount is determined only on the monthly terminal wages of the employee on his exit from the Company after the completion of 5 years of Service. The cost is to be borne by the Company and not by an employee. hence, unlike other fringe benefits (i.e. Medical Insurance, Term Insurance & Accidental Insurance) it can not be part of CTC.
To understand this, let us take an Example,
Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Assuming that expected increase in basic salary is assumed to be 10% p.a.
Now Gratuity Payments for next 5 years will be :-
On Completion of 1 Yr - (15/26)* 28,600*1 = 16,500/-
On Completion of 2 Yrs - (15/26)*31,460*2 = 36,300/-
On Completion of 3 Yrs - (15/26)*34,606*3 = 59,895/-
On Completion of 4 Yrs - (15/26)*38,067*4 = 87,847/-
On Completion of 5 Yrs - (15/26)*41,873*5 = 1,20,788/-
Now for making the payment of gratuity, Company has 2 options :
(i) Pay as you go option - Where company makes a provision of Gratuity in the Balance Sheet on the accrual basis taking an actuarial report on BS date from an Actuary and as and when Mr. A leaves the organization, company pay gratuity from their resources and get the tax benefit for the gratuity paid.
Expected Tax Benefit calculation in case of "Pay as you Go Option" :-
For Provision of 1st Yr - NIL
For Provision of 2nd Yr - NIL
For Provision of 3rd Yr - NIL
For Provision of 4th Yr - NIL
For Payment on 5th Yr - 1,20,788/-
In this case company, Mr. A will leave the company then company will get the tax benefit of Rs. 1,20,788/-.
(ii) Funding Option - In this option, Company decides to Setup an Approved Gratuity Trust . The Investment of Company is either "Self Managed " or “ Manager by Insurance Company”. Company contribute the annual contribution in this Gratuity Trust and get the Tax Benefits. In this case, when Mr. A will leave the company, gratuity will be to Mr. A from the Gratuity Trust.
Expected Tax Benefit calculation in case of “Funding Option” under Section 36(1)(v) of the IT Act 1961 for Annual Contribution which is 8.33% of Annual Basic Salary of Employee.
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
In this case, Mr. A will get gratuity of Rs. 1,20,788/- from the Gratuity Trust and employer will get approximate Tax Benefits of Rs.1,74,536/- for annual contribution made by him in previous 5 years.
To get more clarity on the above example, let us take some more questions about the possibilities/event that may happen on or after completion of 5 years and their impact on the Company in case of "Funding Option" :-
Question 1. If employee died during 1st to 4th year before completion of 5th year, then what would be the benefit for Company and employee's Nominee ?
Answer 1. If employees died after 1 yr, 2nd, 3rd and 4th year but before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
The company will get the Tax for the contribution made by him before the date of death of the employee as stated above and employee's nominee will get following Gratuity Payments from the Trust along with a future service gratuity subject to certain limits as defined by the Insurance Company whilst taking Group Gratuity Scheme from the Insurance Company.
Question 2. If the employee resigns during 1st to 4th year and before completion of 5th year, then what would be the benefit for Company and employee?
Answer 2. If employees resign during 1st to 4th year and before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
and the employee will not get following Gratuity Payment from the Trust. The amount contributed by the company and interest accrued will be used by the trust for future payments of Gratuity to other employees of the company.
Question 3. If the employee resigns/retires after completion of 5th year, then what would be the benefit for Company and employee?
Answer 3. If employees resigns/retires during after completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
Total Contribution in 5 years...........................= Rs.1,74,536/-
and the employee will get Rs. 1,20,788/- as Gratuity Payment from the Trust. Since the company has contributed an amount in the trust is more then what is payable after 5th year so the surplus amount and interest accrued on the contributions of will be used by the trust for payment to the other employees.
From above examples of "Pay as you go Option" and "Funding Option," it is clear that Gratuity cannot be a part of CTC but it is a legal obligation which is borne by the Company on exit of the employee.
The Company may have an option to set up a Gratuity Trust and make an annual contribution in the "Irrevocable Trust" so that he can avail the tax benefits Section 36(1)(v) of the IT Act 1961 and will have a Corpus in "Irrevocable Trust" which will be exclusively used by the Trustees to meet with Company obligation towards Gratuity Payments.
To know more about Employee Benefits Plans Restructuring as per the rules and regulations of the Act/Acts (i.e. Gratuity, Leave Encashment & Long Service Awards), Gratuity Trust Fund Set-up & Retention Schemes like Employer-Employee Scheme for your highly paid Employees.
You may avail our Consultancy Services.
With Regards
Tikaram Chaudhary
Group Gratuity Trust Fund & Group Insurance (Retention Schemes) Consultant
(Experienced Consultant with 10 years of exposure in assessment/valuations of Employees Benefit Liabilities specially Gratuity/Leave Encashment Liabilities & Retention Schemes)
Email Id: gratuityconsultant @ gmail.com
Mobile Number: 9211637063
For more details about us visit our blog at www.gratuityconsultant.blogspot.com
Our Firm “Gratuity Trust Fund Consultant” is engaged in providing to Consultancy Services to Public Sector, Private Sector and Multinational Companies for Formation of Gratuity Trust/Fund as per provisions of the Part C of Fourth Schedule of Income Tax Act 1961 and related Services (i.e. Actuarial Valuation, Compulsory Gratuity Insurance, Gratuity Trust Management etc.)
The most important tax benefit available to Companies of such Gratuity Trust/Fund is available under Section 36 (1) (v) of the Income Tax Act 1961, which is not available to Companies when provision of Gratuity Liability is made in the Balance Sheet (Refer Section 47A (7) of Income Tax Act 1961). The details of Consultancy Services offered by us are as under: -
1. Formation of a New Approved Irrevocable Gratuity Trust,
2. Regularization of Old Gratuity Trust or Group Gratuity Scheme, Surrender of Fund,
3. Vetting of Board Resolutions, Trust Deed, Trust Rules & Application for Approval from CIT,
4. Vetting of Deed of Variations and Applications required by Trustees/Companies for Approvals from CIT for Gratuity Trust in terms of Part C of Schedule IV of Income Tax Act,1961 in following cases: -
a. Change in Name of Trust,
b. Change in Address of Trust,
c. Change in Trustees,
d. Change in Investment of Gratuity Funds from 1 Insurer to another
e. Change in Benefit Formulae for Gratuity Benefits
f. Change in Retirement Age of Employees
g. Change in Object of Trust
i. Approvals for winding up of Trust due to winding up of the Company
j. Approvals for Transfer of Fund in Event of Merger or Demerger
5. Advisory for Process, Advantages & Disadvantages for Formation of Gratuity Trust
6. Advisory for Formation/Restructuring of Gratuity Policy as per Social Security Code, 2020
7. Consultation about Statutory compliances of The Payment of Gratuity Act, 1972 as per Accounting Standards – 15 (Revised 2005) & IndAS19
8. Advisory for Accounting & Compulsory Gratuity Insurance Options for Compliance of The Payment of Gratuity Act, 1972 & *Chapter V-Gratuity of Social Security Code, 2020 (*Date for Implementation yet to be notified)
We have a Team of following Consultants with Decades of Experiences in their field and present Major Cities of India for execution of the assignments in timelines stipulated by our client:-
Ø Legal Consultants - For Legal Issues involved in Formation of Gratuity Trust
Ø Taxation Consultants - For Accounting Related Issues of Gratuity Trust
Ø Income Tax Consultants - For Documentation of CIT Approval of Gratuity Trust.
Ø Investment Consultants - For Gratuity Trust Money Investment Advisory.
Ø Actuarial Valuation Consultants - For Actuarial Valuation Reports/Certificates
Ø Merchant Bankers Consultants – For Assets Value Certification for Investment of Gratuity Trust
Other Related Services to Gratuity Trust Formation: - We also provide Services for preparation of Inputs for Preparation of Actuarial Valuation Reports/Certificates of Actuary required by Gratuity Trust of Indian, Multinational & NBFC Companies required in following events: -
(i). For Initial Funding Assessment of Gratuity and Leave Encashment Liability by Trustees,
(ii). For assessment of Accrued Liability for Gratuity and Leave Liability in following events: -
a. Transfer of Employees within a Group Company.
b. Amalgamation of 2 companies
c. Demerger of company
d. Winding of Company
(iii). For Annual Audit of Balance Sheets of Gratuity Trust as per Actuarial valuations Reports/Certificates are also required by Trustees for compliance of following Accounting Standards: -
a. For Compliance Para 120 (l) of AS 15 (Revised 2005)
b. For Full Compliance Para 120) of AS 15 (Revised 2005)
c. IndAS 19
d. IAS 19 (Revised 2011)
e. US-GAAP
In recent past we have provided our Online and offline Consultancy Services for Formation of New Trust and Matters related to Merger, Demerger, Transfer and Closure of Old Gratuity Trusts to our following clients: -
a. HIBIPL Employees Gratuity Trust
b. IIRIPL Employees Gratuity Trust
c. KDN Employees Gratuity Trust
d. TNS Employees Gratuity Trust
f. Piller Power India Pvt Ltd.
g. Tally India Solution Pvt Ltd.
i. Compact India Pvt. Ltd.
j. NNE India Ltd
k. Capsitech IT Services Pvt Ltd.
l. Aditya Infotech
m. Max Speciality Pvt Ltd
n. Surya Roshni
o. Sysmind Tech Pvt Ltd
p. NABCONS Staff Group Gratuity Trust (NABARD Consultancy)
q. Group of St. Xavier Schools
r. HIBIPL Employees Gratuity Trust
s. Blaser Swisslube,
t. Ion Group Companies & more than 1100 clients spread in all Sectors of Indian Economy.
In case of any query or clarification you may send your requirements at tikaramchaudhary @
CAclubindia
