Why creating gratuity trust becomes mendatory for companies

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant)   (2187 Points)

01 March 2018  


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.