GRATUITY TRUST SUMMARY Group Gratuity Scheme : Under section 4A of the Payment of Gratuity Act,1972 gratuity amount is required to e insured y the emp!oyers" #n this conte$t %ife #nsurance &orporation of #ndia has f!oated a po!icy for insurance of gratuity to the emp!oyees of organisation" Under the ao'e , a trust is required to e esta!ished y the emp!oyer for the purposes of managing the gratuity funds" (rust )i!! )i!! create a fund )ith the %#& against payment of gratuity" &ontriution to)ards the fund are genera!!y intimated y %#& to trust on annua! asis" (his ca!cu!ation ca!cu!ation is ased on acctur accturia! ia! asis" (he other part is insurance of the fund" (rust )i!! dea! )ith the %#& for payment of contriutions to)ards the gratuity fund and #nsurance premium for the insurance of gratuity to the emp!oyees of the company" (hese premiums are to e paid on annua! asis" *enefit of the same to the emp!oyer is that the contriutions paid y emp!oyer to gratuity trust )i!! e recognised as e$penses for the year in a!ance sheet though these are to e uti!ised in future" +urther in case a ig numer of emp!oyees !ea'e organisation at one time , the financia! urden on the em!oyer )i!! not e direct!y proportionate to the numer of emp!oyees !eft" (he reason is that the emp! em p!oy oyer er has a! a!rea ready dy di disc schar harged ged hi his s !ia !iai i!it !ity y in par parts ts and has pa paid id ann annua ua!! premium" (he other iggest enefit is that in case of death of an emp!oyee during the course of emp!oyment , the nominee )i!! get gratuity amount not on!y for the period of rendered ser'ices ut ti!! the date of retirement"(his part is eing taen care y %#& against the insurance premium paid y emp!oyer" #t is su sugg gges este ted d th that at e efo fore re ma main ing g tr trus ustt ru ru!es !es - .o .ode de!! co copie pies s ar are e gener genera! a!!y !y pro'ided y the %#&/ p!ease go through the same and amend as per your requirement" (his trust is a!so a!s o required to e recognised y #ncome (a$ (a$ Authorities" (his part is eing taen care y %#&" INCOME TAX RULES FOR GRATUITY +or Gratuity Payment .anagement, 0mp!oyer has option to fund the !iai!ities for pa pay yme ment nt of gr grat atui uity ty y se sett ttin ing g up an ir irre re'o 'oca ca! !e e (rus ustt an and d ma mai ing ng contriutions to the (rust +und" (he Gratuity (rust +und must e appro'ed in terms of Part & of the +ourth Schedu!e to the #ncome (a$ Act, 191" #f a (rust +und is set up contriutions can e a!!o)ed as deduction under section -3/ of
the #ncome (a$ Act, 191 as reproduced e!o): any sum paid y the assessee as an emp!oyer y )ay of contriution to)ards an appro'ed fund created y him for the e$c!usi'e enefit of his emp!oyees under an irre'oca!e (rust5" 6hi!e payment of contriution is a!!o)ed as deducti!e e$penditure, gratuity payments )i!! not e a!!o)ed as usiness e$penditures since gratuity )i!! e paid out of the (rust +und" 2/ (he interest income of the Gratuity +und is not !ia!e to #ncome (a$ in terms of Section 1 -28/ -i'/ of the #ncome (a$ Act, 191 )hich dea!s )ith #ncome not inc!uded in tota! income5" 28 -i'/ any income recei'ed y the (rustees on eha!f of an appro'ed Gratuity +und5 / Gratuity (rust +unds are a!so suect to Part #3 of the #ncome (a$ ;u!es, 192" #ncome (a$ ;u!es 9< to 111 dea!s )ith Appro'ed Gratuity +unds5" .ost of the ;u!es are procedure ut more important ;u!es are reproduced e!o) :
;u!e 12 : Admission of directors to a fund 6here the emp!oyer is a company as defined in c!ause -i/ of su=section -1/ of section of the &ompanies Act, 198 -1 of 198/, a director of the company may e admitted to the enefits of the fund on!y if he is a )ho!e time onafide emp!oyee of the company and does not eneficia!!y o)n shares in the company carrying more than fi'e per cent of the tota! 'oting po)er"5 ;u!e 1 : >rdinary annua! contriution (he ordinary annua! contriution y the emp!oyer to a fund sha!! e made on a reasona!e asis as may e appro'ed y the &hief &ommissioner or &ommissioner ha'ing regard to the !ength of ser'ice of each emp!oyee concerned so, ho)e'er, that such contriution sha!! not e$ceed < 1? percent of the sa!ary of each emp!oyee during each year"5 ;u!e 14 : #nitia! contriutions (he amount to e a!!o)ed as a deduction on account of an initia! contriution )hich an emp!oyer may mae in respect of the past ser'ices of an emp!oyee
admitted to the enefits of a fund sha!! not e$ceed < 1? percent of the emp!oyee@s sa!ary for each year of his past ser'ice )ith the emp!oyer"5 #nitia! contriution in respect of past ser'ices )as e$pected to e paid in one !ump sum ut in terms of re!ocation, it can e paid in insta!!ments o'er a period not e$ceeding fi'e years" Annua! contriutions are restricted to < 1? of current sa!ary a!though gratuity is paya!e on fina! sa!ary"
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Encyclopedia on Gratuity 1.
Gratuity – Meaning of –
Gratuity refers to the gracious payments made to the employee in appreciation of the prolonged services rendered by the employee to the employer and is normally payable at the time of termination of employment or retirement or death of employee. 2.
Gratuity funds
Gratuity fund is generally established in the form of a trust. A few employees become the trustees of such fund. The contributions made towards the Gratuity fund generally depends on the Actuarial Valuation. However, an employer may approach a life insurer in order to purchase a group gratuity plan. The Gratuity trust can invest its funds by making a contribution under a Group Gratuity Scheme of an insurer. Thus, the employer has to pay annual contributions to the insurance company as decided by the insurance company. The gratuity will be paid by the insurance company based upon the terms of the group gratuity scheme. 3.
Approved Gratuity Funds
Section !5 " of the Act defines an #approved gratuity fund$ as #a gratuity fund which has been and continues to be approved by the %hief %ommissioner or %ommissioner in accordance with the rules contained in &art % of the 'ourth Schedule$. (n order to get the approval of the chief commissioner or commissioner, an application needs to be made under )ule *+, including prescribed particulars regarding the employer, nature of business of the employer, employees eligible to participate in the fund and verified in the prescribed manner. However, as per circular dated -***/* if the rules of a gratuity fund, duly constituted under an irrevocable trust, satisfy certain prescribed conditions
(mentioned in table below), the contributions made by the employers may be allowed as a deduction in their incometa0 assessments and the rules need not be forwarded for approval.
A
the benefit of the fund shall be open to only those persons who are wholetime bona fide employees of the employer, having no substantial shareholding interest1 the trust money shall be invested in such trusted securities as are payable both as regards capital and interest in (ndia1 the gratuity shall be made payable and shall be paid only in (ndia1 the trustees shall be responsible for deduction of ta0 from the gratuities and crediting the ta0 so deducted to the Government revenue1 the contributions shall be made on a reasonable basis acceptable to the (ncometa0 3epartment, i.e., either on actuarial basis or any other basis having regard to the length of service of each employee concerned1 so much of the contribution as cannot properly be treated as ordinary annual contributions shall be treated by the %ommissioner of (ncometa0 in the same manner as is adopted by the %entral 2oard of )evenue to deal with similar contributions to an approved superannuation fund.
2 % 3 4
'
)ule 5!*" of &art % of the 'ourth Schedule to the (ncome Ta0 )ules specifically lays down that an application for approval of a gratuity fund shall be accompanied by two copies of the accounts of the fund for the last three years for which such accounts have been made up. This provision contemplates that an application for approval may be made - years after the establishment of a gratuity fund. However the board has clarified that, in order that the benefits of approval for the intervening period may not be denied to bona fide gratuity funds, the %ommissioners may, after considering all the relevant facts of the case, accord approval to a gratuity fund with effect from the date from which it satisfies the conditions laid down in rule - of &art % of the 'ourth Schedule. Hence if the fund satisfies the conditions for approval laid down in )ule - than such a fund can make an application for approval. )ule !" of &art % of the 'ourth Schedule to the (ncometa0 Act, provides that the %ommissioner shall communicate to the trustees of a gratuity fund the grant of approval with the date on which the approval is to take effect. 4.
Appeal against the order of chief commissioner or commissioner refusing approval
An employer, ob6ecting to an order of the %hief %ommissioner or %ommissioner refusing to accord approval to a gratuity fund or an order withdrawing such approval may appeal, within si0ty days of such order, to the Board in 'orm 7o. 55 verified in prescribed manner and accompanied with a fee of one hundred rupees.
5.
Contributions to the Fund
a.
Initial Contributions
8hen a new fund has been formed and approved, the employer may make contribution to such fund in respect of the services rendered in the past years by the e0isting employees. Such contribution however shall not e0ceed 9* :- per cent of the employees$ salary for each year of his past service with the employer. b.
Annual contributions
The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the %hief %ommissioner or %ommissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not e0ceed 9* :- per cent of the salary of each employee during each year. ;. Contributions by employer, when deemed to be income of employer. 8here any contributions by an employer !including the interest thereon, if any" are repaid to the employer, the amount so repaid shall be deemed for the purposes of incometa0 to be the income of the employer of the previous year in which they are so repaid. .!inding up or amalgamation of the fund 8inding up or amalgamation of the fund with another fund shall re
#ariation to the rules of the fund
)ule **+ of the (ncome ta0 rules lays down that any amendment to the rules of the fund re
of contribution made to approved gratuity funds
=nder section -;!*"!v " of the Act, any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the benefit of his employees under an irrevocable trust is allowable as a deduction in the computation of income from business:profession. However, no allowance shall be made in respect of a payment to a provident or other fund established for the benefit of employees unless the employer has made effective arrangements to secure that ta0 shall be deducted at source from any payment made from the fund which are ta0able under the head >Salaries?.
%%. $eduction of contribution made to other than approved gratuity funds Section 5+!A"!@" places a bar on deduction of any provision made for payment of gratuity by the employer e0cept where the same is for contribution to approved gratuity fund or if the gratuity is payable in the previous year in which such provision is made. 12. Income
of an approved Gratuity Fund
(ncome of an approved gratuity fund is e0empt under Section *+!/"!iv". 13. &a'ability
of gratuity in the hands of employees
Gratuity payable to an employee is ta0ed as part of the employee$s salary income under Section *@ !i" !iii". However, Gratuity is ta0 free up to half months$ !*/:; of last drawn salary for each year of service for employees covered by payment of gratuity Act" average salary of last *+ months for each completed year of service, sub6ect to a ma0imum of )s. -, /+,+++ !in both cases" under Section *+!*+".
