Gratuity trust fund



Hi Everyone,

One Company has subscribed to Group Gratuity with LIC of India since last couple of years. Now the Company wants to start its own Gratuity Fund. My querry is:

1. Whether this is permitted under Income Tax Act?

2. Process in Income Tax for this Migration

3.Tax Implications if any, on the Company

4. Any other factors that need to be considered

Thanks & Regards 

 
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Accountant

1. Yes

2. From the year you get approval from Income Tax Deptt you will contribute the amount into thus created trust. Complete Migration is with cooperation with LIC. The gratuity amount shall be certified by a Professional = who will work on the basis of present basic salary, date of joining, date of birth or date of returement etc. etc.

3. No Tax implication: However, you have to pay the gratuity amount every year to the Gratuity Trust. However, if Company does not pay then this expenditure will not be allowed.

4. Proper separate, bank account, books of accounts (on receipt and payment basis) shall be maintained. Will be audited by a CA. Separate Return of Income Tax shall be filed. Minute Books and record of Meeting of Trustees shall be recorded. Outgoing employees will get their legitimate gratuity from this Gratuity Trust. Valuation of Gratuity amount as narrated in point 2 above.

contact @ vkbajaj.co.in

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Consultant

Sir,

As per Rule 110 of Income Tax Rules- "No alteration in the rules, constitution, objects or conditions of an approved fund shall be made without the prior approval of the Chief Commissioner or Commissioner."

Does resignation of a trustee and appointment of a new trustee amounts to alteration of constitution?  Please clarify

Thanks,

 
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Gratuity Trust Consultant

Benefits of Creating Group Gratuity Trust Fund

 

For more details on the above subject visit - http://groupgratuityfundconsultantindelhi.blogspot.in/2017/12/benefits-of-creating-group-gratuity.H T M L

 
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Gratuity Trust Consultant

Benefit of Creating Group Gratuity Trust Fund with Insurance Company & 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

 For more details visit - http://groupgratuityfundconsultantindelhi.blogspot.in 

 
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Gratuity Trust Consultant

Why Gratuity Trust Fund Approval is required ?

The Payment of Gratuity (Amendment) Act 2018 provides a Financial Security to Employees working in all organizations such as factory, mine, oilfield, port, railways, plantation, shops, establishments or educational institution (i.e. Private Schools, Colleges, etc. etc.) having 10 or more employees on any day in the preceding 12. 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.

The 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 20,00,000/-.

For Accounting of Retirement Benefits, Private Schools/Private Companies make provisions of Retirement Benefits by taking Actuarial Valuations Reports/Certificates from Actuary.

Gratuity Trust Fund Setup to get deduction under section 36 (V) of the Income Tax Act, 1961  for contributions made in Gratuity Trust Fund with Life Insurance Corporation of India - LIC or Other Insurance Agency (i.e SBI Insurance, Bharati Axa Life Insurance etc. etc.).

To get the benefits of Section 10 (25) (iv) of the Income Tax Act, 1961 (i.e. any income received by the Trustees on behalf of an approved Gratuity Fund). It is mandatory for Private School/Private Companies to Get Approval of Gratuity Trust Fund

Tikaram Chaudhary

Gratuity Trust Fund Consultant

Mobile Number  - 9211637063

Email ID - gratuityconsultant @ gmail.com

Blog : http://gratuityconsultant.blogspot.com

 

 
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Gratuity Trust Consultant

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 

 
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Gratuity Trust Consultant

A Note on factors increasing the Gratuity Payments & Benefits of Setting up Retirement Benefits Trust Fund for Gratuity Benefits

 

An Overview Gratuity Benefits

 

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 5 years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

 

Calculation of Gratuity Benefits

 

Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. It means, Gratuity amount will be determined when monthly terminal wages of the employee are known to the company. The terminal wages will include Basic & Dearness allowance only. The Gratuity Benefits are calculated using following formulae :-

 

(15/26)  multiplied by (No of Completed Years on Exit)  multiplied by  (Terminal Wages)

 

 

Factors affecting Gratuity Benefits

 

Gratuity Benefits changes with change in the following :-

 

(a) Past Service of Employee in the Company,

 

(b) Increase in wages of Employee in the Company,

 

(c) Change in Benefit Formulae of the Gratuity Benefit due to amendment in the Act,

 

(d) Change in Ceiling Limit on Gratuity Benefits due to amendment in the Act,

 

(e) Change in Vesting Condition for eligibility of  Gratuity Benefits due to amendment in the Act,

 

 

The impact of above Factors on Gratuity Benefits can be understood by the following Examples :

 

(a) Change Past Service of Employee in the Company.

 

Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month and there is no change in basic salary, only his Past Service Change then Gratuity Payments for next 5 years will be :-

 

            On Completion of 1 Yr - (15/26)* 2,60,000*1 = 1,50,000/-

            On Completion of 2 Yrs - (15/26)*2,60,000*2 = 3,00,000/-

            On Completion of 3 Yrs - (15/26)*2,60,000*3 = 4,50,000/-

            On Completion of 4 Yrs - (15/26)*2,60,000*4 = 6,00,000/-

            On Completion of 5 Yrs - (15/26)*2,60,000*5 = 7,50,000/-

 

The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.

 

 

 

 

 

 

 

(b) Increase in wages of Employee in the Company.

 

Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month and there is change in wages @ 10%,  then Gratuity Payments for next 5 years 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/-

 

The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.

 

(c) Change in Benefit Formulae of the Gratuity Benefit due to amendment in the Act.

 

Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month, His increment in wages @ 10%,  and due to change in the Gratuity Factor as 1/1 from 15/26 then Gratuity Payments for next 5 years will be :-

          

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

               On Completion of 2 Yrs - (1/1)*3,14,600*2 = 6,29,200/-

               On Completion of 3 Yrs - (1/1)*3,46,060*3 = 10,38,180/-

               On Completion of 4 Yrs - (1/1)*3,80,670*4 = 15,22,660/-

               On Completion of 5 Yrs - (1/1)*4,18,730 *5 = 20,93,660/-

 

The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.

 

(d) Change in Ceiling Limit on Gratuity Benefits due to amendment in the Act.

 

Mr. A Joins the Company with a Basic Pay of Rs. 5,00,000/- per month, His increment in wages @ 10%,  and due to change in Ceiling Limit from 10 Lakhs to 20 Lakhs then Gratuity Payments for next 5 years will be :-

         

Case 1 - When Gratuity Ceiling is 10,00,000/-

 

            On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-

            On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-

            On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/- Company liable to pay 10,00,000/-

            On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/- Company liable to pay 10,00,000/-

            On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/- Company liable to pay 10,00,000/-

 

Case 2 - When Gratuity Ceiling is 20,00,000/-

 

            On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-

            On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-

            On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/-

            On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/-

            On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/- Company liable to pay 20,00,000/-

 

 

Case 3 - When Gratuity Ceiling is 30,00,000/-

 

            On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-

            On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-

            On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/-

            On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/-

            On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/-

 

(e) Change in Vesting Condition for eligibility of  Gratuity Benefits due to amendment in the Act.

 

In above examples for (a) to (d), If employee leaves the company before completion of 5 years then "Nil" gratuity benefit is payable in following events :

 

(a) on his superannuation, or

(b) on his retirement or resignation.

 

Case 1 - When Vesting Condition for eligibility is 3 years, Company will be liable to pay gratuity benefit on completion of 3 years in event of his superannuation, on his retirement or resignation.

 

Case 2 - When Vesting Condition for eligibility is 2 years, Company will be liable to pay gratuity benefit on completion of 2 years in event of his superannuation, on his retirement or resignation.

 

Case 3 - When Vesting Condition for eligibility is 1 year, Company will be liable to pay gratuity benefit on completion of 1 year in event of his superannuation, on his retirement or resignation.

 

Gratuity Benefits are long term benefits and are subject to above changes, so it become mandatory for  Companies to make Accounting/Investment for Gratuity Benefits. In India companies have 2 options for Accounting/Investment:

 

(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 an employee leaves the organization, company pay gratuity from their resources and get the tax benefit for the gratuity paid.

 

(ii)  Funding Option - In this option, The Company 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.

 

 

We have a Team of Litigation Partners, Labor Law Experts, Finance/Insurance Professionals for handling Accounting/Investment for Gratuity Benefits and we have provided consultancy for administration Gratuity Trust Fund/Retirement Trust Fund  in various organization in all sectors of Indian Economy on receipt of their Management request and If you wish to know details like:-

 

1.  Who can be covered under Group Gratuity Scheme?

2.  Why companies required to create a Group Gratuity Trust - Decision Making?

3.  How can companies administer Gratuity Trust?

4.  What are Tax Benefits to Company by setting up Gratuity Trust ?

5.  What are General Benefits to Employee from a Gratuity Trust Set up by Company ?

6.  Where to approach for setting up Gratuity Trust?

7.  What is the documentation required for setting up Gratuity Trust?

8.  What is the Process of Setting up a Gratuity Trust ?

9.  Which is beneficial to trustees a Self Managed Investment or Insurance Co. Managed Investment?

10. What is the Accounting requirement for Trustees?    

 

We may also be contacted for other alternate ways company can choose for administration of Investment for Retirement Benefits and Long Term Retention Schemes f Productive Employees/Top Management of Companies ?

     

 

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)

Blog : http://gratuityconsultant.blogspot.com

Website : https://gratuity-trust-fund-consultant-in-delhi-ncr.business.site/?m=true

 

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

 

(This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.)

 

 
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Originally posted by : VirtualOffice

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