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Reconstitution of gratuity trust deed

Ramesh sharma (employee) (18 Points)

06 November 2017

Anyone have the Format of Deed for reconsitution of gratuity trust ? please forward. thank you

Required as original deed lost and new directors appointed for the company, wanted to form a reconsitution of trust

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3 Replies

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

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

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

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

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

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

Impact on Gratuity Liability due to change in Gratuity Ceiling Limit

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

The following table this impact :-

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

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

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

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

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

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

Types of Group Gratuity Trust Funds

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 13 February 2024

Karnataka Government becomes the 3RD State to notify the requirement of Compulsory Gratuity Insurance for fulfillment of provisions of following :-

1. Sub-Section (2) & (4) of Section 4A of The Payment of Gratuity Act, 1972,

2. Subsection (5) of Section 2 Income Tax Act 1961,

3. Part C of Fourth Schedule of Income Tax Act, 1961

4. Rule 98-111 of Income Tax Rule, 1962

5. Chapter II of Indian Trust Act, 1882

6. AS 15 (Revised 2005) & IndAS 19

7. Insurance Act, 1938

The Government of Karnataka has notified above notification to ensure that there will be no default in terms of Payment of Gratuity to Private Sector employees even in case of Bankruptcy of Company as this notification specified that “Employer shall at all times maintain the gratuity trust and gratuity fund, as an Irrevocable System”

The gazetted notification is attached herewith for your kind perusal.

The Karnataka Government has notified the above Rules called “Karnataka Compulsory Gratuity Insurance Rules, 2024 (hereinafter referred as KCGIR, 2024)” on 10th January 2024. The last date for completion of compliance of KCGIR, 2024 is 09.03.2024 (i.e. 60 Days after date of notification).

Our firm GTFC - Gratuity Trust Fund Consultant has provided the end to end Consultation Services to more than 1000 Indian and Multinational Companies spread in PAN India in all Sectors of Indian Economy for Formation of Approved Gratuity Fund under Irrevocable Trust and mandatory requirements for employers to obtain insurance for the payment of gratuity to eligible employees and ensure compliance with the provisions of the Payment of Gratuity Act, 1972.

Our Consultation Services covers all the aspects (i.e. Legal, Actuarial, Insurance, Investment and Accounting) of getting the Valid Insurance within the stipulated timeline for implementation of Karnataka Compulsory Gratuity Insurance Rules, 2024. Our consultation covers:-

1. Consultation for Assessment for Applicability of KCGIR, 2024 on the establishment,

2. Consultation for Actuarial Valuation for Assessment of Gratuity Liability as per AS 15 (Revised 2005)/IndAS 19 for Initial Contribution and Annual Compliance in Balance Sheet,

3. Consultation for Formation Approved Gratuity Fund under Irrevocable system as prescribed in the KCGIR, 2024,

4. Liaison with the Leading Insurance Companies for getting the Valid Insurance like :-

a. Life Insurance Corporation of India (LIC)

b. SBI Life Insurance Company Limited

c. Pramerica Life Insurance Limited

d. Bajaj Allianz Life Insurance Co. Ltd

e. ICICI Prudential Life Insurance Company Limited

5. Consultation for Registration of Gratuity Trust in sub-registrar office and thereafter Registration of Establishment in Form I or FORM II as prescribed in KCGIR, 2024,

6. Consultation for Vetting Deed of Variations for Change in no of Trustee required by companies with Existing Approved Gratuity Fund under Irrevocable Trusts,

7. Consultation for Vetting of Application prescribed u/s Rule 109 of Income Tax Rule 1962 & Documents to obtain the CIT Approval as per provisions of Part C of Fourth Schedule of Income Tax Act, 1961,

For more details in the matter or any requirement for formation of the Gratuity Trust, you may connect us at tikaramchaudhary @ gratuitytrustfund.com