Income tax return of gratuity fund set up with lic

Romesh Tawari (PROPRIETOR) (56 Points)
Replied 21 November 2013

Gratuity fund is generally established in the form of a trust. A few employees become the trustees of such fund.

The contributions made towards the Gratuity fund generally depends on the Actuarial Valuation. However, an employer may approach a life insurer in order to purchase a group gratuity plan. The Gratuity trust can invest its funds by making a contribution under a Group Gratuity Scheme of an insurer. Thus, the employer has to pay annual contributions to the insurance company as decided by the insurance company. The gratuity will be paid by the insurance company based upon the terms of the group gratuity scheme.

Approved Gratuity Funds

Section 2(5) of the Act defines an ‘approved gratuity fund’ as ‘a gratuity fund which has been and continues to be approved by the Chief Commissioner or Commissioner in accordance with the rules contained in Part C of the Fourth Schedule’. In order to get the approval of the chief commissioner or commissioner, an application needs to be made under Rule 109, including prescribed particulars regarding the employer, nature of business of the employer, employees eligible to participate in the fund and verified in the prescribed manner.

Final Conclusion: if your gratuity fund registered u/s under rule 2 (1) part 'c' of part 'C' Schedule of It act than ----

Income of an approved gratuity fund is exempt under Section 10(25)(iv).

further it should be maintened books of account and audited annually,

return of gratuity fund will be filled in ITR -7.

Thanks

Romesh Tawari

1 Like

Rishikesh Joshi (Student) (35 Points)
Replied 12 March 2015

But, suppose if the Gratuity Fund (Trust) is not registered u/s under rule 2 (1) part 'c' of part 'C' Schedule of IT Act and also not registered under the respective states Public Trust Act, then is there a requirement to get the books of fund audited? If yes then under which form the Audit Report needs to be submitted or prepared? Thanks in advance.

Rishikesh Joshi (Student) (35 Points)
Replied 12 March 2015

But, suppose if the Gratuity Fund (Trust) is not registered u/s under rule 2 (1) part 'c' of part 'C' Schedule of IT Act and also not registered under the respective states Public Trust Act, then is there a requirement to get the books of fund audited? If yes then under which form the Audit Report needs to be submitted or prepared? Thanks in advance.

Rishikesh Joshi (Student) (35 Points)
Replied 12 March 2015

But, suppose if the Gratuity Fund (Trust) is not registered u/s under rule 2 (1) part 'c' of part 'C' Schedule of IT Act and also not registered under the respective states Public Trust Act, then is there a requirement to get the books of fund audited? If yes then under which form the Audit Report needs to be submitted or prepared? Thanks in advance.

Raju C S Prabhkar (fCA, CISA., LLB) (21 Points)
Replied 19 December 2015

Hi do i notify the income tax department , about the changes in Grutity fund trust deed.

Raju

amol bhurewar (employee) (51 Points)
Replied 20 January 2016

dear friend,

you have to inform to income tax dept for every change in Gratuity trust deed.

thanks

amol

RAHUL JAIN (ASSISTANTMANAGER INTERNAL AUDIT ) (111 Points)
Replied 05 July 2016

KINDLY PLEASE CLARIFY CONTRIBUTION BY COMPANY IN GRATUITY TRUST IS ALSO REQUIRED TO CONSIDER IN TRUST INCOME OR ONLY INTEREST IS INCOME OF THE TRUST.

Sunil Bhageria (Chief General Manager) (26 Points)
Replied 21 September 2016

Dear sir,

Can you tell me the form no. in which audit report of Gratutiy trust is to be submitted. Is it for 10 B or some other form.

Sunil

CA DHARMENDER KUMAR (CA) (108 Points)
Replied 29 September 2016

Dear Sir,

According to Section 10(25)(iv) of Income Tax Act, 1961, any income received by the trustees on behalf of an approved gratuity fund is exempt from tax.

The word mentioned here is "trustee" and not "trust". Can you help me out with the taxability for Trust and not trustee.

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

Benefits of Creating Group Gratuity Trust Fund

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

Prathyusha reddy (CA Article Assistant) (178 Points)
Replied 17 March 2018

Dear Romesh Tawari Sir,

Can you please tell me, in ITR-7, For employee gratuity trust which section is applicable 139(4A) or 139(4E) ??

and if the trust is approved from Commissionare of Income tax, do we compulsory mention the approval number in ITR ??

Thanks In Advance :)

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 23 February 2019

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

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 23 February 2019

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

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 02 March 2019

Tax Benefits of setting up a Gratuity Trust?

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 benefit. It means, Gratuity amount can be determined only on the monthly terminal wages of the employee on his exit from the Company after 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 “ Managed 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 more details, you may visit my write up at https://www.citehr.com/609164-benefits-setting-up-gratuity-trust-companies.H T M L

We have provided consultancy for administration Gratuity Trust Fund in the 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 Gratuity Trust Fund?
2. How can companies administer Gratuity Trust and avail of the tax benefits?
3. Benefits to Employer,
4. Benefits to Employee,
5. Gratuity Trust Fund -Interpretation of Tax Implications.

We may also be contacted for the structuring of other Retention Schemes, Group Health Insurances, Group Terms Insurances, Group Annuity Plans, Group superannuation Plans, Property/Fire Insurances and investment in 100% risk-Free Government of India Bonds (GOI Bonds)