Gratuity Fund Management - planning to credit this SB account/LIC on a monthly basis, with the calculated value - CiteHR
TIKARAM CHAUDHARY
Gratuity & Leave Encashment Trust Fund
Anandakumar.kg
Manager-hr
+1 Other

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Dear Seniors, We are a Pvt Ltd company started in March 2010. Currently our employee strength is around 70, across various locations in India. Our internal auditors who visited us recently has indicated that we are not adhered to the regulations of Gratuity Act.

I am aware that we have to follow the below mentioned procedure.

1. Submit Form A to the concern authority

2. Open up a trust for gratuity, with an SB account for the trust

3. Link the trust with LIC schemes (Optional).

We are planning to credit this SB account/LIC on a monthly basis, with the calculated value. Upon the employee becomes eligible, we would pay from this SB account/LIC

Kindly correct me, if our plan is wrong.

My doubt is, if an employee leaves the organisation, before the completion of 5 years, can the amount accumulated in the SB account/LIC on behalf of that individual, be credited back to the company account.

If not, how can we proceed to avoid unnecesary blocking of company's fund.

Your inputs would be much of an value for us. Kindly clarify. Thanks in advance.

Each year authorities of LIC will call for data of employees on which premium to be calculated for the gratuity trust in which your question is answered that LIC only manages the fund , LIC will release the gratuity to the trust and trust will release to employee concerned. Its all upon the manament by you that gratuity to be paid as per provisions of the Gratuity Act.
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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

Dear Mr. Kumar,
Gratuity is a obligatory liability enforced by the " Payment of Gratuity Act" and its liability lies on Company either company pays it to employee when he/ she leaves the company after completion of 5 years of Service or Company creates a Gratuity Trust (It should be irrevocable Trust means whatever money is contributed to the fund it will used for payment of Gratuity only) and payment for the gratuity due is paid by the trust.
If company is contributing it into a Gratuity Trust account then it cannot be paid back to the employer even though employee has not completed 5 years of service as employer has already got the tax benefits for the contribution made by him in past years for particular employee/employees.
Fore more details in the matter you contact us.

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