1. Brief about Gratuity Benefit
As per guidelines 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 within 30 days to his employees as soon as it becomes payable.(Refer Sub Section (2) of Section 7 to the Act).
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.
3. 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. The Gratuity Ceiling Limit can be raised by the employer to give additional benefits to his employees.
4. 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.
5. Impact of Increasing Wages and Length of Employment of Future payments of Gratuity
Gratuity Benefits depends upon 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 due to the annual increase in salary and increasing service period.
For Example. If Mr. A at Age 48, joins the Company where retirement Age is 60 yrs. with a Basic Pay of Rs. 2,60,000/- per month and there is a change in wages @ 10% annually, then Gratuity Payments for next 5 years and on *retirement 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/-
On Completion of 12 Yrs - (15/26)*8,15,991*12 = 56,49,198/-*
6. Provisions for Employer under the Payment of Gratuity Act 1972 (Amended)
Section 7 of the Act has kept the obligation for payment of gratuity act on the shoulders of the employer, few provisions of this section act are listed below:-
1. As soon as Gratuity becomes payable, it employers responsibility to determine the amount of gratuity and inform it to employee in writing (Refer subsection 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).
3. 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).
7. Options for Gratuity Liability Management
From point 5 & 6, it is clear that the Gratuity Liability increase exponentially with the increase in wages of employee and service period of employee. Also, it is employers responsibility to pay the gratuity to the employee in any case. Companies have generally 2 options for discharging the Gratuity Liability: -
1. Pay as go options – In this option, the employer makes provision of Gratuity Liability by taking an Actuarial Valuation Report/ Certificate from An Actuarial Service provider in Compliance of AS 15 (Revised 2005) in their Financial Statement and whenever an employee leaves the organization, the employer pays him gratuity from his own resources.
2. Funding Option – In this option, the Employer creates an irrevocable Gratuity Trust and gets the approval from Income Tax Department and contribute funds into the Gratuity Trust annually and get tax benefits section 36 (1) (v) of the income tax act, 1961 and as and when an employee leaves the organization, gratuity amount paid by the gratuity trust.
8. Why Funding Option is preferred by organizations?
Companies make provision of Gratuity liability in the balance on annually on an accrual basis based on actuarial report but it is not allowed as deduction whilst computing net Income of Income Tax (Refer Section 47A (7) of Income Tax Act 1961), So companies prefer to create Gratuity Trust. To avail the Tax Benefit under benefits section 36 (1) (v) of the income tax act, 1961 for Initial and Annual Ordinary Contribution, employer prefer Funding Option.
There are 2 major categories of Gratuity Trust, which is based on the Investment Management of the Contribution received from the organization.
(a) Self Managed Trust - In this category of Gratuity Trust, Trustee manages the investment of contribution received from the employer in the manner prescribed by the Government of India vide Rules 101 & 67 of Income Tax Rules, 1962 and earn tax-free Interest. Contribution received from the employer and interest earned from the Investment together is used to discharge the gratuity liability of employees of the organization.
(b) Insurer Managed Trust - In this category of Gratuity Trust, Trustee approach LIC or other Insurer for management the investment of contribution received from the employer. LIC or other Insurer company receive the contribution from the employer Investment is done by the LIC or other Insurer company. Few Benefits of LIC or other Insurer Managed Gratuity Trust is as under:-
(i) The job of investment and interest is paid by the LIC or other Insurer company 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. It is a special feature of LIC Managed Gratuity Fund.
(iii) LIC or other Insurer the company maintains the fund under the name of the trust.
(iv) Investment of funds is taken care by LIC or other Insurer company & 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 or other Insurer company to make payment of Gratuity as per Scheme to the Trust.
The establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise of various professionals. We have 10 years of experience in providing above Consultancy Services and We have collaboration with leading Finance Professionals, Litigation Partners, Chartered Accountants, Company Secretaries, Registered Valuers & Heads of Insurance Companies to complete the assignment. In the past 10 years, we have given Consulting Services for Gratuity Trust Formation, Gratuity & Leave Encashment Policy Restructuring and Actuarial Valuation Services to CFOs, Directors, Heads of HR, Finance and Tax Planning Department of the Companies. Our clientele is 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. The Services offered by us are as under:-
1. Consulting Services for Gratuity Trust Formation.
2. Consulting Services for Gratuity Trust Investment in Group Gratuity Schemes.
(a) Traditional Group Gratuity Schemes of LIC
(b) Unit Linked Gratuity Schemes of all Private Insurance Companies.
3. Consulting Services for Gratuity & Leave Policy Restructuring as Employee Retention Policy.
4. Consulting Services for Legal issues involved in Gratuity & Leave Encashment Policy.
5. Specialized Consulting Support Services for Registered Valuer's valuations:-
(a) Actuarial Valuations under Gratuity & Leave Encashment plan - For compliance of AS 15(R)
(b) Plant and Machinery Valuations- For compliance of AS 10
(c) Land and Building Valuations- For compliance of AS 10
(d) Securities or Financial Assets Valuations- For Compliance of Section 42 of Companies Act
(e) Merchant Banker Valuations - For Compliance of Section 42 & 62(i)(c) of Companies Act
6. Consulting Services for Investment in Immediate & Deferred Annuities as retention benefit for highly productive employees or as a retirement benefit.
7. Consulting Services for all types of Group, General, Health insurances such as Marine Insurances, EAR Insurance, Corporate Property, Fire Insurances, etc.
In case you or your clients have a requirement for the above service then you can contact us.
Gratuity Trust Fund Formation & Compliance Valuations Consultant
Office Address: R 11, F/F, R Block, Vikas Nagar, New Delhi -110059
Mobile Number : 9211637063
Email Id : tikaramchaudhary @ gmail.com & gratuityconsultant @ gmail.com,
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(All Consultancy Services provided by us are subject to terms & conditions will be stated when a consultation job is accepted.)