Why creating gratuity trust becomes mendatory for companies


GM Operations to Actuary & Gratuity Trust Fund Consultant

WHY CREATING GRATUITY TRUST BECOMES MENDATORY FOR COMPANIES

Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. MNC's, Schools and Other business entities) having more than 10 employees . Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.
Gratuity Benefit falls in the category of “Defined Benefits” & 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 10,00,000/-. Which is likely to raised from 10,00,000/- to 20,00,000/-.

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.

Gratuity Benefits depends upon last drawn monthly wages and is linked to 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 annual increase in salary and increasing service period. 

Let us take an example of employee and understand the Impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Benefits payable to him on his date of retirement. The particulars of employee are as under :-

Name of Employee - Mr. Bhanu Pratap
Date of Birth - 31.03.1984
Date of Joining - 31.03.2007
Date of Retirement - 31.03.2044
Basic Salary - 5200/-
Retirement Age - 60 Years
Increment Rate -   8% p.a. 

Calculation of Gratuity Payable on 31.03.2017 

Age on 31.03.2017 - 33 yrs.
Completed years of Service - 10 yrs.
Remaining Service Period up to Retirement- 27 yrs.
Gratuity Factor - 15/26
Ceiling Limit on Gratuity - 10,00,000/-
Gratuity Payable on 31.03.2017 = (15/26) x No of Completed years of Service Up to 31.03.2017 x Basic Salary
= (15/26) x 10 x 5200
= 30,000/-

Calculation of Gratuity Payable on Retirement assuming there is no change in ceiling limit and benefit formula of Gratuity Payment. 

Completed years of Service till Retirement - 37 yrs.
Expected Salary on Retirement - 41,538/-
Gratuity Factor - 15/26
Ceiling Limit on Gratuity -  10,00,000/- 
Gratuity Payable on retirement = (15/26) x No of Completed years of Service Up to retirement x Expected Basic Salary with annual increment of 8%.
= (15/26) x 37 x 41538
= 8,86,675/-

From above example it is clear that there is a bearing impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Payable to employee on 31.03.2017 and on his retirement. If we calculate the impact from the above example, Gratuity payable to Mr. Bhanu Pratap on Retirement @ a increased salary of 8% p.a. compounded with his increased service period up to retirement is 8,86,675/- which is 29.55 times the Gratuity Payable to him on 31.03.2017 (i.e. 30,000/-).

As stated above, Gratuity Benefits Payable to employees in future years has a bearing Impact of Annual Increase in Salary and Increasing Service Period, hence it is advisable to Organisations (MNC's, Schools, Private Universities, Private Companies) to do early strategic financial planning to mitigate the effect of "Annual Increase in Salary and Increasing Service Period" 

To know more details/Tax benefits available to organisation after creating a Gratuity Trust Fund, you may visit our blog at https://gratuitytrustfund.blogspot.in. You may also send your requirement at our email address - tikaramchaudhary @ gmail.com or call us at 9211637063 for your query.
 

 
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GM Operations to Actuary & Gratuity Trust Fund 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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GM Operations to Actuary & Gratuity Trust Fund Consultant

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:-

v  Accounting Standard 15 (Revised 2005)

v  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 CFOsDirectors, Heads of HRFinance 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:-         

v  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. 

v  Consultation for Restructuring of Gratuity or Leave Encashment Policy. 

o   For Retention of Most Productive Employees.

o   For Enhancement Productivity and Liability Management.    

v  Consultation for all types of Business Valuations 

o   Actuarial Valuations

o   Capital Gain Valuations

o   Property Valuations

o   Machinery Valuations

o   Shares Valuations 

v  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: http://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.) 

 
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