Tikaramchaudhary@sify.com
Client Relation Manager To Actuary
Dlghr89
Head Hr - Mahindra Aerospace
Audnis
Chief Accountant
Pv
Student
+5 Others

Thread Started by #poonam.gandhi


Dear Friends,

Greetings for the day. I have a question on the gratuity, though this subject has discussed in the length in the CTHR many times, and I have gone through that discussion also but I could not find the appropriate answer on the following points.

Is that mandatory to set-aside the gratuity funds with the LIC or any other trust from the inception.

Can the Employer pay the gratuity to the outgoing employees, when he /she leave the organization?

Can that legally deduct the gratuity amount on a monthly turn from the employees being a part of their CTC?

In case we opt for the LIC scheme, is it possible to switch the entire contribution to the LIC in the installments, if yes how many installments are allowed to pay the previous dues

Our company is planning to pay the gratuity to the outgoing employees on case to case basis, when its’ really become due.

I sincerely seek your help to get this implemented in our company .Kindly update

Many Thanks
Poonam Gandhi
4th May 2010 From India, Delhi
1) Its not mandatory to keep funds with LIC or any other fund managers. Actually Companies do it to get expenses allwoed by the Income Tax. As per income tax, if gratuity contibution is kept with approved trust, then expesnes can be claimed in the Income Tax return. If one keeps gratuity contribution with it self, then in Income Tax, expenses will be allowed once grtauity is actually paid.

These fund managers also provide life insurance equal to grtuity benefit for the staff.

2) Company has to pay gratuity to those employees, who have served 5 or more years, at the time of leaving the company. In case of death, gratuity is paid even though employee has not completed 5 years.

3) Some companies show gratuity as part of CTC. But I think it can not be deducted from the employee's gross salary.

4) When you swicth over for 'grtauity fund management' first time in the Company and Company is already in business for years, lot of contribution is demanded by the fund manager on account of previous contribution. This previous contribution is calculated by the actuary. It depends how much contribution out of that, Company wants to give to fund manager. So please discuss with you fund manager and pay the contribution as per agreed terms.

5) Some companies who have high staff turnover like IT sector, reject the valuation of actuary, according to them it does not give fair value. However as per accounting standard 15, issued by ICAI, provision for gratuity will be made in the books accounts on the basis of acturial basis. So it will be always good to get valued your garuity from acturial in real scenario.

6) Please cross check the same before implementation. I also request experts to correct me if I am wrong.

Thx
4th May 2010 From India, New Delhi
Hi
can anyone could share the legal sanctity on the following:
What if the employer does not pay for the gratuity to the outgoing employees?
What if the employer shift the eligible employees from one company to the another
I would appreciate if the seniors could come forward and update the right thing
Regards
Poonam
4th May 2010 From India, Delhi
In gratuity act Form F use for nomination for dependents and form H for modification in dependents nomonation. For Information purpose.
4th May 2010 From India, Mumbai
Please cross check the same before implementation. I also request experts to correct me if I am wrong. Thx
4th May 2010 From India, Mumbai
dear sir,
i have a doubt, if registering gratuity from an approved insurer is not compulsory what does sec 4A compulsory insurance provide for. i came thru this sec when i was reading the gratuity act 1972
5th May 2010 From China
Hi
What Sandeep has answered is absolutely right.
Further clarifications
a) Gratuity can not be deducted from employees salary.
b) If the employer does not pay the eligible employee on separation then legal action can be initiated. Only in case of a proven misconduct through enquiry the gratutiy can be forfeited.
c) Irrespective of the employees being shifted from company to company of the same employer there will be continuity of service.
Kind regards
Dayanand L Guddin
5th May 2010 From Singapore, Singapore
Yes, section 4 A of payment of gratuity Act 1072 refers, in most of the cases, that Employer should obtain Life Insurance for gratuity. But it does not state that gratuity fund complusorirly should be invested with such life insurance company.
Thx
Sandeep
6th May 2010 From India, New Delhi
Recently the payment of gratuity amendment bill has been passed by the parliament and it shall come into force on such date as the central Govt. may, by notification in the official Gazette. Does it mean that the effective date of this bill is on the date of notification or any retrospective date ?
K.V.Aravindakshan
6th May 2010 From India, Kochi
I agree with Sandeep & Mr. Dayanand.
I have a case and would like to know from our friends, whether an employee on resigning from a company in one post joins immediately the same company in a higher post, will be eligible for gratuity?
This type of situation comes in public sector banks when an employee after selection in higher post on advertised post has to resign from his pearlier post and joins fresh. Though there is generally no break in service and the person has worked more than 5 years in previous post. Should he be paid gratuity? And what about payment of PF?
Thus can an employee have two or more gratuity payments from same employer.?
Members are requested to enlighten on this.
PV
6th May 2010 From India, Mumbai
Gratuity Fund has to be created by a deed and registered for management of funds and authority:
1. Opening of Gratuity Fund account with a Nationalized Bank.
2. Valuation done by Authorized Actuary : If you furnish a statement of Employees with their date of Birth, Date of Joining, their monthly Salary details and provide a column for the Actuary to fill in the gratuity accrued to them as per Gratuity act.
3. Now before the companies year end accounts, you have to provide the provision of Gratuity in the books of accounts, and before its due date that money should be Deposited into the Gratuity Fund account you maintain with a Nationalized Banks.
4. Now from next year, every year you will send the statement before the year end and get the valuation done. So the Total Gratuity Provision as per the new Statement you will see how much has been already created and you will now provide the difference and transfer the Funds to Gratuity Fund account. Say previous year valuation shows Rs.1,85,000/- and new valuation shows Rs.2,25,000/- then the difference of Rs.40,000/- will be current year Gratuity Provision you have to pay into the Current Account of Gratuity Fund Account with the Nationalized Bank. Unless this money is paid before the due date Income Tax will not allow this as a deduction. So Payment of money into the Gratuity Fund account with proof is mandatory.

NOW COME TO HOW TO MANAGE THE GRATUITY FUND ACCOUNT:

There is a statutory Provision for Investment of Gratuity Fund money in Authorized Secutiies. This you will get a copy from Actuary also. They will guide you.
1. Invest this amount in the manner of (%) prescribed by the act and rules of Gratuity Act.

They will say 40% in Central or State Govt. Secutiies.
Another in other forms of Security; 40% in special Account with the Nationalized Bank itself as per Gratuity Act.
Balance in Current Account say 20%
to make the 100%.
You have to check if the Listed Investments are Authorized under the
Gratuity and eligible Securies. Otherwise it is not an authorised investment under the Gratuity Act and Rules.

You have to manage the Funds:
If an employee leaves the organization:
You will calculate the amount as per Gratuity Payment Rules. This is nothing to do with the amount of Actuary Valuation done by the Actuary. Actuarial Valuation is only a provision under the act for payment funds from company account to Gratuity Fund Account. This cannot be reversed.

Now you will calculate the amount due to the Employee Rs...........
Now you will look for the amount in the Current Account Rs..............
If this amount is sufficient to pay to the Employee then you will give a check for the amount due to him, and take a Payment Voucher under XYZ COMPANY LTD.-GRATUITY FUND ACCOUNT

If suppose there is shortage of Funds then you first transfer some amount from company account to Gratuity Fund and then pay the due amount to the Employee.

At the year end, you will remove the employees name from list altogether. No need to show his name at all.
Thereby the new provision will be available from the Actuary:

At the year end:Then now look into your as of date: (what is actually available)
List of Investments: Rs...............
Add:Interest Received Rs................
Balance in the GF-Current Account Rs...............
Total of all the above.Rs................
New Provision as per list Rs..............
The difference will be now further transferred to Gratuity Fund Account.

LIKE COMPANIES ACCOUNTS ARE AUDITED, AUDIT OF GRATUITY FUND ACCOUNT IS ALSO TO BE DONE AND AUDIT CERTIFICATE IS TO BE OBTAINED.

GRATUITY FUND IS AN INDEPENDENT ENTITY AND
EVERY ACTION, INVESETMENT ETC. ARE TO MINITED IN THE MINUTES OF MEETING OF TRUSTEES OF FUND AND RESOLUTION IS TO BE PASSED.
AUTHORIZED SIGNATORIES FOR INVESTMENT, AND BANK ACCOUNTS ARE TO BE MADE WITH ANY TWO THE TRUSTEES WILL SIGN THE DOCUMENTS AND OPERATE THE BANK ACCOUNTS AND INVESTMENT FUNDS.

PAYMENT TO EMPLOYEE IS ALSO BE RESOLVED IN THE MEETING AND COPY KEPT IN RECORDS WITH PROPER SIGNATORY OF TRUSTEES.

The main issue is Gratuity Fund is seperate account and this funds cannot be misued.
Close monitoring of the Investments and getting the interest warrants and follow if not received.
Change in Trustees due to retirement, death and other reasons to be minuted and change of authorized Trustees to be circulated and recorded for all investments wherever necessary.

Regards
Ramakrishnan Sarma
6th May 2010 From Saudi Arabia
We are providing actuarial consultancy in the area of employee benefits wherein compliance of Accounting Standards of the Institutes of Chartered Accountants is applied. Most important institute, in the Indian context, is The Institute of Chartered Accountants of India. The relevant accounting standard applicable to accounting for employee benefits issued by The Institute of Chartered Accountant of India is Accounting Standard-15 (Revised 2005) and some of the important employee benefits involving actuarial treatment are :-
Gratuity
Leave Encashment
Pension
Post Retirement Medical Benefits
Since annual financial statements such as Balance Sheet and Profit/ Loss Statement of your clients are at hand for the close of the financial year as on 31.03.2013, the services we deal in will be needed by you and we will be happy to provide our services if needed. For further details we request you to visit our website at <link no longer exists - removed>
Tikaram Chaudhary
9211637063
31st January 2013 From India, Delhi
Is it still not mandatory (in Maharashtra) for every factory to have a gratuity insurance funded with LIC or some other approved insurer ?? A S Bhat
16th June 2015 From India, Pune
Please let me know if your company requires actuarial valuation of gratuity leave pension prmb or any other benefit. 9038781794 is my number. I am a consultant
1st September 2018 From India, Kolkata
An overview about Gratuity Benefits
When an employee leaves the service, employer rewards him for his accrued service in the organization. He does so by giving you a free lump sum of cash - called gratuity in financial parlance - on your exit. The amount that an employer gives is based on the number of years of service employee have put into the organization.
As per Gazette notification issued by Ministry of Law & Justice in The Gazette of India on dated 29th March 2018 as applicable WEF same date amends the Ceiling Limit from "ten lakh rupees" to "such amount may be notified by the Central Government from time to time" is substituted. A pdf copy of same is available at following weblink:- http://egazette.nic.in/WriteReadData/2018/184298.pdf
When is Employee entitled to Gratuity?
Gratuity in earlier days was rather arbitrary and completely hostage to the whims of the employer. A wealthy, well-established employer would reward his dedicated employees and the not so rich would refuse such generosities. This led to a lot of discord and finally, the government stepped in, passing the Payment of Gratuity Act, 1972, making it mandatory for all employers with more than 10 employees to give them the gratuity. Employees, as defined here, are the ones hired on company payrolls. Trainees are not eligible and gratuity is paid on the basis of the employee's basic plus dearness allowance if any.
How much can an employee get?
An employee becomes entitled to a gratuity on resignation or on retirement after five years# or more of service. As per the Act, the gratuity amount is 15 days' wages multiplied by the number of years put in by you. Here wage means your basic plus dearness allowance. Take the monthly salary drawn by you last (basic plus dearness allowance) on resignation or retirement and divide it by 26, assuming there are four Sundays in a month. This is your daily salary. Multiply this amount by 15 days and further with the number of years you have put into service. 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. get at the time of retirement/resignation after completion of 5 years of continuous service. In case of Death of Employee, his/her nominee/nominees without any vesting condition of 5 years as gratuity is payable to nominee immediately after death of an employee.
History of amendments in Gratuity Act?
Gratuity benefit is usually payable at the time of retirement. Since at the time of retirement employee generally has no source of regular income and due to old age- increasing medical expenses and increasing inflation to meet with day to day expenses. So to cope up with all these uncertainties, Gratuity Payment becomes a financial support to meet necessary expense as a single one-time payment. The rules and regulations being prescribed in Gratuity Act 1972 need to be amended from time to time and Labour Ministry tries to provide full justice by making amendments to the above act, in the national Parliament. Some of the amendments in the Payment of Gratuity Act 1972 are as follows:-
The first amendment made by the Payment of Gratuity (Amendment) Act, 1984 inter alia provides for raising the wage limit for coverage from Rs 1000/- to Rs 1600/- per month and appointment of Inspectors.
The second amendment made by the Payment of Gratuity (Second Amendment) Act, 1984 inter alia re-defined the term ‘continuous service’ and provided for the grant of exemption to a class of employees from the operation of the Act.
The third amendment made by the Payment of Gratuity (Amendment) Act, 1987 inter alia provided for:-
(a) Raising the wage limit for coverage from Rs 1,600/- to Rs 2,500/- per month, which was further raised to Rs 3,500/- p.m. .
(b) Replacing the ceiling of twenty month’s wages for payment of gratuity by a monetary ceiling of Rs 50,000/-
(c) Making it obligatory for the employers to pay simple interest at a specified rate if the gratuity is not paid within 30 days from the date it falls due.
(d) Compulsory insurance/setting of gratuity fund for payment of gratuity.
In later amendments, wage limit was removed altogether and ceiling limit was revised from time to time. Ceiling limit was raised to Rs 100,000 from Rs 50,000 in 1994 and further raised to Rs. 3,50,000 in 1997.
As per Payment of Gratuity (Amendment) Act 2009, all Teaching Staff in all the unaided educational institutions eligible for payment of gratuity with retrospective effect from 1997.
As per Payment of Gratuity (Amendment) Act 2010, the ceiling limit of Gratuity was raised from 10 Lakhs to 20 Lakhs effective from 25.05.2010.
As per Gazette notification issued by Ministry of Law & Justice in The Gazette of India on dated 29th March 2018 as applicable WEF same date amends the Ceiling Limit from "ten lakh rupees" to "such amount may be notified by the Central Government from time to time" is substituted.
Why is Consultation needed by the employers/Schools and employees/Teachers in Gratuity Benefits related matter?
As informed in the above write-up, Gratuity Benefits are governed by the Payment of Gratuity Act and it is an additional benefit that employees/teachers in the Private Sector Companies and Private Schools. Due to complexity in the technical matters related to the Payment of Gratuity Act and due to lack of Proper Financial Management of Gratuity Liability in the start of private companies/private schools try to avoid to make the payment of Gratuity, so lots of disputes arise between employers (i.e. Private Companies and Schools) and employees/Teachers. In such situation consultation of Professionals is required.
We have a team of highly skilled and talented Professionals having decades of experience in handling the following matters :-
1. Legal Issues involved in Gratuity Payments.
2. Accounting Aspects of Gratuity Trust Fund.
3. Income Tax Approvals of Gratuity Trust.
4. Gratuity Computation related issues.
5. Self Managed Gratuity Trust Fund Advisory.
6. Advisory for Short Term/Long Term Investment for Gratuity Liability.
7. Assistance in calculation of Gratuity Payment as per "The Payment of Gratuity Act 2017 Amended.
In case of any requirement in any of the above matter you may contact us at the following :-
Tikaram Chaudhary
Head Consultant - Group Gratuity Benefits
Mobile Number - 9211637063
Email ID -
Blog :Benefits of Creating Group Gratuity Trust Fund with Insurance Company
*Terms and condition will apply.
1st September 2018 From India, Delhi
This post is an attempt to give a brief about Impact of increase in Salary and Past Service on Gratuity Payments and requirement of Gratuity Trust Fund to meet .
Gratuity benefits are governed by  "The Payment of Gratuity Act 1972" and paid by the employer 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 case of (c) vesting condition of 5 years does not apply.
Liability on account of gratuity experiences sharp increase every year due to the nature of its computation. Apart from an increase in service, an increase in salary also contributes to increase in liability substantially as the benefits are payable on the last drawn salary.
For Example,
Gratuity Liability of an employee of 35 yrs. with basic salary as Rs, 26,000/- and have completed 5 years of Past service as on 31.03.2018 will be :-
 (15/26)*26000*5
= 75,000/-
Case 1
Gratuity liability with Increase of 1 year past service and without any increment in Basic Salary.
Gratuity Liability of an employee of 36 yrs. with basic salary as Rs. 26,000/- and have completed 6 years of Past service as on 31.03.2019 will be :-
 (15/26)*26000*6
= 90,000/-
Case 2
Gratuity liability with Increase of 1 year past service & 5% increment in Basic Salary (i.e. 26000*1.05 = 27300/-)
Gratuity Liability of an employee of 36 yrs with basic salary as Rs. 27,300/- and have completed 6 years of Past service as on 31.03.2019 will be :-
 (15/26)*27300*6 = 94,500/-
Gratuity Liability on retirement in 31.03.2043 with 5% increment in Basic Salary {i.e. 26000*(1.05^25) = 88045/-}
Gratuity Liability of this employee on retirement at age 60 yrs with basic salary as Rs. 88,045/- with 30 years as on 31.03.2043 will be :-
 (15/26)*88045*30 = 15,23,860/-
From above example, it is clear that with a small change of 5.00% in basic salary, increases the gratuity liability by 1.26times in 1 year. Similarly 5% increase over next 25 yrs in Basic Salary will increase the gratuity liability 20.32 times which is payable on 31.03.2018 . Hence it becomes mandatory for employer to start investing in Gratuity Fund with consistent growth and insulated from market risks.
To know more about : -
1. Steps Involved in creating a Gratuity Fund,
2. How to use Gratuity Fund as Retention Tool for curbing the attrition rate,
3. Quantum of Income Tax Benefits of creating Gratuity Fund,
4. Steps Involved  Approval of Gratuity Trust Fund from competent Authority,
5. Critical issues & Features of Group Gratuity Schemes of Insurers
3rd February 2019 From India, Delhi
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