Under which section does a trust which has an exempt income under 10 (25) (iv) has to file return of Income?

I hope below write up may give more clarity on the provisions of Payment of Gratuity Act 1972 (Amended)”

Under the provisions 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 to his employees as soon as it becomes payable (Refer Sub Section (2) of Section 7 to the Act).

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.

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. 

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 injury or disease. 

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

Gratuity Benefits depends upon the 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

Provisions for Employer under Payment of Gratuity Act 1972 (Amended)”

Section 7 of the Act has kept obligation for payment of gratuity act on the shoulders of the employer, few provisions of the 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).

2.      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).

 Accounting of Gratuity by the Employer

The Companies Act regulates/prescribes the Accounting Standard/Accounting Standards for the accounting of payment of Gratuity in the Financial Statements of different organizations. The compliance of Accounting Standard/standards is mandatory in nature.

 The Institute of Chartered Accountants of India prescribes following Accounting Standard/standards for accounting of Gratuity by the companies:-

  Accounting Standard 15 (Revised 2005)

  Ind AS 19

For Accounting of Gratuity by Schools, The Institute of Chartered Accountant has issued Guidance note on Accounting by Schools (2005) or as amended at time to time.

Under the accounting preview, gratuity falls in the category of the defined benefit plan and is a post-retirement benefit. The nature of computation of post-retirement benefit is complex and hence Actuarial Valuation Certificate/ Report of an Actuary (Para 49 of AS 15 Revised 2005) forms the basis of accounting provisions of gratuity in the financial statement.

 Income Tax Rules for Gratuity

 Accounting provision of gratuity in Financial Statements/Balance Sheet is not allowed as a deduction under Section 40A(7) of Income Tax Act, 1961 (as amended time to time). The Section is produced below:-

 “ (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of Gratuity to his employees on their retirement or on termination of their employment for any reason.

   (b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.”

 For gratuity payment management, the employer has the option to fund the liabilities for payment of gratuity by setting up an irrevocable trust approved in terms of part c of the fourth schedule to the income tax act, 1961.

 The contributions made by the employer in such trust is allowed as a business expense under section 36 (1) (v) of the income tax act, 1961. This section is produced herein below:-

 “ (a) any sum paid by any sum paid by the assessee  as an employer by way contribution towards an approved gratuity fund created by him for the exclusive benefits of his employees under an Inrrecovable Trust.”

 For more details in the above matter then you may contact us at 9211637063 or email your requirement at tikaramchaudhary @ gmail.com.

I have 10 years of experience in providing consultation and have a team of leading Finance professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies. In my 10 years of experience I have given consultation to CFOs, Directors, Heads of HR, Finance and Tax Planning department of the Companies, 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.

 We offer consultation for the following services:-         

 Consultation for Traditional and Unit Linked Group Gratuity Schemes. 

o   Traditional Group Gratuity Schemes of LIC

o   Unit Linked Group Gratuity Schemes of Private Insurance Cos. 

  Consultation for Restructuring of Gratuity or Leave Encashment Policy. 

o   For Retention of Most Productive Employees.

o   For Enhancement Productivity and Liability Management.    

  Consultation for all types of Business Valuations 

o   Actuarial Valuations

o   Capital Gain Valuations

o   Property Valuations

o   Machinery Valuations

o   Shares Valuations 

  Consultation for Employee Retention Schemes, Retirement Investment in Annuities, Marine Insurances, EAR Insurance, Corporate Property, and Fire Insurances.   

Tikaram Chaudhary

Group Gratuity Trust Fund Consultant

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

Mobile Number : 9211637063

Email Id : gratuityconsultant @ gmail.com

Blog: https://gratuityconsultant.blogspot.com

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

LinkedIn 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.) 

I hope below write up may give more clarity on the provisions of Payment of Gratuity Act 1972 (Amended)”

Under the provisions 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 to his employees as soon as it becomes payable (Refer Sub Section (2) of Section 7 to the Act).

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.

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. 

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 injury or disease. 

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

Gratuity Benefits depends upon the 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

Provisions for Employer under Payment of Gratuity Act 1972 (Amended)”

Section 7 of the Act has kept obligation for payment of gratuity act on the shoulders of the employer, few provisions of the 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).

2.      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).

 Accounting of Gratuity by the Employer

The Companies Act regulates/prescribes the Accounting Standard/Accounting Standards for the accounting of payment of Gratuity in the Financial Statements of different organizations. The compliance of Accounting Standard/standards is mandatory in nature.

 The Institute of Chartered Accountants of India prescribes following Accounting Standard/standards for accounting of Gratuity by the companies:-

  Accounting Standard 15 (Revised 2005)

  Ind AS 19

For Accounting of Gratuity by Schools, The Institute of Chartered Accountant has issued Guidance note on Accounting by Schools (2005) or as amended at time to time.

Under the accounting preview, gratuity falls in the category of the defined benefit plan and is a post-retirement benefit. The nature of computation of post-retirement benefit is complex and hence Actuarial Valuation Certificate/ Report of an Actuary (Para 49 of AS 15 Revised 2005) forms the basis of accounting provisions of gratuity in the financial statement.

 Income Tax Rules for Gratuity

 Accounting provision of gratuity in Financial Statements/Balance Sheet is not allowed as a deduction under Section 40A(7) of Income Tax Act, 1961 (as amended time to time). The Section is produced below:-

 “ (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of Gratuity to his employees on their retirement or on termination of their employment for any reason.

   (b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.”

 For gratuity payment management, the employer has the option to fund the liabilities for payment of gratuity by setting up an irrevocable trust approved in terms of part c of the fourth schedule to the income tax act, 1961.

 The contributions made by the employer in such trust is allowed as a business expense under section 36 (1) (v) of the income tax act, 1961. This section is produced herein below:-

 “ (a) any sum paid by any sum paid by the assessee  as an employer by way contribution towards an approved gratuity fund created by him for the exclusive benefits of his employees under an Inrrecovable Trust.”

 For more details in the above matter then you may contact us at 9211637063 or email your requirement at tikaramchaudhary @ gmail.com.

I have 10 years of experience in providing consultation and have a team of leading Finance professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies. In my 10 years of experience I have given consultation to CFOs, Directors, Heads of HR, Finance and Tax Planning department of the Companies, 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.

 We offer consultation for the following services:-         

 Consultation for Traditional and Unit Linked Group Gratuity Schemes. 

o   Traditional Group Gratuity Schemes of LIC

o   Unit Linked Group Gratuity Schemes of Private Insurance Cos. 

  Consultation for Restructuring of Gratuity or Leave Encashment Policy. 

o   For Retention of Most Productive Employees.

o   For Enhancement Productivity and Liability Management.    

  Consultation for all types of Business Valuations 

o   Actuarial Valuations

o   Capital Gain Valuations

o   Property Valuations

o   Machinery Valuations

o   Shares Valuations 

  Consultation for Employee Retention Schemes, Retirement Investment in Annuities, Marine Insurances, EAR Insurance, Corporate Property, and Fire Insurances.   

Tikaram Chaudhary

Group Gratuity Trust Fund Consultant

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

Mobile Number : 9211637063

Email Id : gratuityconsultant @ gmail.com

Blog: https://gratuityconsultant.blogspot.com

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

LinkedIn 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.) 

Season of Audit for FY 24-25 is already started from 01.04.2025 and I hope my below write-up about the Mandatory Accounting and Legal Compliances related to Gratuity Benefits may help CA/CS/Auditors in performing the Audits of the Indian and MNC Companies:-

1. Accounting Compliance as per provisions of the Companies Act, 2013.

2. Legal Compliances as per provisions of the Payment of Gratuity Act, 1972.

3. Social Security Code 2020 (Draft) Compliances to be implemented in FY 2025-26

The details of the above compliances is as under :-

1. Accounting Compliance – Accounting Compliances are applicable to all Companies operating in 36 States/UT’s with total Number of Employees 10 or more. As per provisions of Section 129 of the Companies Act 2013, All Indian and Multinational Companies Operating India needs to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year in compliance of Accounting Standards as stipulated in Section 133 of the Companies Act 2013, so that they can give a true and fair view of state of affairs of the company. Accounting and Disclosure requirements for Employee Benefits Plans (i.e. Gratuity Plan) is laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI) -

(i) AS-15 (Revised 2005)

(ii) IndAS-19

Generally, Actuarial Valuations for compliance above Accounting Standards are required for Gratuity and following Employee Benefit Plans under: –

a. Actuarial Valuation for Gratuity Plans,

b. Actuarial Valuation for End of Service Benefit Plan,

c. Actuarial Valuation for Earned Leave Plan,

d. Actuarial Valuation for Sick Leave Plan,

e. Actuarial Valuation for Defined Benefit Pension Plans,

f. Actuarial Valuation for Post-Retirement Medical Benefit Plan,

g. Actuarial Valuation for Settlement Allowances on Retirement,

h. Actuarial Valuation for Long Service Award Plans/Incentive Plans,

i. Actuarial Valuation for Interest Rate Guarantee for Exempted Provident Funds,

j. Actuarial Valuation for other Defined Benefit,

The Actuarial Valuations are required by the Indian Companies in following events :-

I. For making the Initial & Annual Contribution into Gratuity Trust Account.

II. Annually, Half Yearly and Quarterly for making provision of Gratuity Liability in BS as Accounting Standards (i.e. AS 15 Revised 2005) and IndAS 19) per Section 133 of the Companies Act, 2013

III. On The Date of Transfer of Employees from One Company to Another

IV. On the Date of Acquisition

V. On the Date of De-merger

VI. For Submission of Actuarial Reports of last 5 year in SEBI for Listing on Share Market

VII. For assessment of Actuarial Liability for Taking Grant from any Ministry

2. Legal Compliances - All Indian and Multinational Establishments with employees strength 10 or more are compulsory requires to comply with the following provisions of the Payment of Gratuity Act, 1972 & The Payment of Gratuity Rules. As per provision of Rule 3 of the Payment of Gratuity Rules – Notice of Opening, Change or Closure of the Establishment following Forms to be submitted by the all establishment to Competent Authority (i.e. DLC Office) :-

I. Form A

II. Form B

III. Form C

IV. Form F

V. Maintenance of Records other Forms as specified in Rules

VI. Compulsory Gratuity Insurance – For All companies operating in 3 States with Registered Office without any branch or unit outside in following States:

1. Karnataka

2. Telangana

3. Andhra Pradesh

The companies the above 3 States are required to Comply with Karnataka Compulsory Gratuity Insurance Rules, 2024, Telangana Compulsory Gratuity Insurance Rules, 2016 & Andhra Pradesh Compulsory Gratuity Insurance Rules, 2011and mandatorily requires to:-

a. To obtain an Actuarial Report and get Gratuity Liability assessed,

b. To Establish an Approved Gratuity Fund as per Clause (5) subsection 1 (d) of Section 2 of Income Tax Act, 1961 under Irrevocable Trust in compliance of Part C of Fourth Schedule of Income Tax Act, 1961, Rule 98 to 111 of the Income Tax Act, 1962 & Indian Trust Act 1882,

c. Trustee of the Gratuity Trust to obtain Valid Gratuity Insurance from Insurer,

d. Register the establishment in Form I or Form II & maintain Form III,

e. Maintain the Gratuity Fund equivalent to Liability computed in the Actuarial Reports in compliance of AS 15R/IndAS 19 and comply with the related Accounting/Audit/ITR7/ITR5 compliances of the Approved Gratuity Fund at the each Financial Year.

3. Social Security Code (Draft) 2020 Compliances - 36 States/UT’s have published the Drafts of Social Security Code (2020) to be implemented in FY 2025-26. The implementation of Social Security Code will be in Phased Manner :-

i. In First Phase – Indian & MNC,s Companies with 500+ Employees

ii. In Second Phase - Indian & MNC,s Companies with 100 to 500 Employees

iii. In third Phase – Indian & MNC,s Companies with below 100 employees

Few Mandatory Provisions of Social Security Code (Draft) 2020 related to Gratuity Benefits are listed below :-

I. Registration and cancellation of an establishment. – The provisions of subrule 1, 2 & 3 of rule 3 of the Chapter 1 of the Draft THE CODE ON SOCIAL SECURITY, 2020 are as follows :

i. Every establishment to which this Code applies shall be electronically or otherwise, registered within such time and in such manner as may be prescribed by the Central Government: Provided that the establishment which is already registered under any other Central labour law for the time being in force shall not be required to obtain registration again under this Code and such registration shall be deemed to be registration for the purposes of this Code,

ii. Any establishment to which Chapter III or Chapter IV applies, and whose business activities are in the process of closure, may make an application for cancellation of registration granted under this section,

iii. The manner of making application for cancellation of the registration under Sub-section (2), the conditions subject to which the registration shall be cancelled and the procedure of cancellation and other matters relating thereto, shall be such as may be prescribed by the Central Government.

II. Compulsory Gratuity Insurance –The provisions of Subrule (1), (2) & (3) of Rule 57 OF Chapter V of the Draft Rules of THE CODE ON SOCIAL SECURITY, 2020 are as follows :

57. (1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance in the manner prescribed by the Central Government, for his liability for payment towards the gratuity under this Chapter, from any insurance company regulated by the Authority as defined under clause (b) of sub-section (1) of section 2 of the Insurance Regulatory and Development Authority Act, 1999: Provided that different dates may be appointed for different establishments or class of establishments or for different areas.

57. (2) The appropriate Government may, subject to such conditions as may be prescribed by the Central Government, exempt any employer who had already established an approved gratuity fund in respect of his employees and who desires to continue such arrangement, and every employer employing five hundred or more persons who establishes an approved gratuity fund in the manner prescribed by the Central Government from the provisions of sub-section (1).

57. (3) For the purposes of effectively implementing the provisions of this section, every employer shall within such time as may be prescribed by the Central Government get his establishment registered with the competent authority in the manner prescribed by the appropriate Government and no employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2).

57. (4) The appropriate Government may provide for the composition of the Board of Trustees of the approved gratuity fund and for the recovery by the competent authority of the amount of the gratuity payable to an employee from the insurer with whom an insurance has been taken under sub-section (1), or as the case may be, the Board of Trustees of the approved gratuity fund, in such manner as may be prescribed.

57. (5) Where an employer fails to make any payment by way of premium in respect of the insurance referred to in sub-section (1) or by way of contribution to an approved gratuity fund referred to in sub-section (2), he shall be liable to pay the amount of gratuity due under this Chapter (including interest, if any, for delayed payments) forthwith to the competent authority.

Explanation.— In this section, "approved gratuity fund" shall have the same meaning as assigned to it in sub-section (5) of section 2 of the Income-tax Act, 1961.

It is important to note that the provisions of Section 4 A Compulsory insurance of the Payment of Gratuity Act, 1972, Karnataka Compulsory Gratuity Insurance Rule, 2024, Telangana Compulsory Gratuity Insurance Rules, 2016 & Andhra Pradesh Gratuity Insurance Rules 2011 & Rule 57 of THE CODE ON SOCIAL SECURITY, 2020 are having similar provisions for compliance by the Indian & Multinational Companies and once The Code on Social Security, 2020 is implemented in FY 2025-26 irrespective of Phases all companies are required to :-

a. To obtain an Actuarial Report and get Gratuity Liability assessed,

b. To Establish an Approved Gratuity Fund as per Clause (5) subsection 1 (d) of Section 2 of Income Tax Act, 1961 under Irrevocable Trust in compliance of Part C of Fourth Schedule of Income Tax Act, 1961, Rule 98 to 111 of the Income Tax Act, 1962 & Indian Trust Act 1882,

c. Trustee of the Gratuity Trust to obtain Valid Gratuity Insurance from Insurer,

d. Register the establishment in Form I or Form II & maintain Form III,

e. Maintain the Gratuity Fund equivalent to Liability computed in the Actuarial Reports in compliance of AS 15R/IndAS 19 and comply with the related Accounting/Audit/ITR7/ITR5 compliances of the Approved Gratuity Fund at the each Financial Year.

In case of any clarification or query you may connect us at

Email Id - tikaramchaudhary @ gratuitytrustfund.com

Website - www.gratuitytrustfund.com