Nagarkar Vinayak L
Hr And Employee Relations Consultant
Kritarth Consulting
Posh Programs; Hr Management Consultants
TIKARAM CHAUDHARY
Gratuity & Leave Encashment Trust Fund
+1 Other

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Benefits of Set up of Gratuity Trust by the Companies
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 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 “ Managed 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:
Mobile Number: 9211637063
For more details about us visit our blog at www.gratuityconsultant.blogspot.com

Noteworthy Write Up, Choudhary Sir. Crystal Clear Examples to Explain. Kudos for Efforts put in by you Sir Kritarth Team HRD Caretakers, 23 Feb 2019
Thanks Mr.Tikaram Chaudhary for sharing valuable inputs on group gratuity funding. B.Saikumar HR & Labour Relations Adviser
Dear Colleague,
The examples given makes the point very clear regarding computation of the Gratuity liability of the employer.
But it is difficult to accept the view that it should not treated as part of the CTC because it is solely Employer's responsibility.
In fact that is exactly why it should be considered a part of CTC and at the time of making salary offer to prospective employee , it would not be improper to consider it as cost to the employer. What would be wrong is if the employer makes deduction from the monthly gross salary towards Gratuity which is illegal, as was pointed out in some other posts earlier on this subject.
Regards,
Vinayak Nagarkar
HR- Consultant

Dear Mr. Nagarkar,
I hope my below reply may help you in understanding "Why Gratuity cannot be part of CTC"
CTC is Cost to Company which is actually borne by the Company during any year.
All components of CTC other than Gratuity are Short Term Benefits that can be computed and paid within 12 months.
While Gratuity is contingent benefit and one can not determine actual cost that has to be borne by the company until and unless the event occur when it will be actually paid to the employee and hence it is a part of long term provision. So it can not be shown as a part of CTC.

Dear colleague, Since Gratuity is like any other statutory cost like PF, ESI and Bonus which is considered as part of CTC , I beg to differ with you. Regards, Vinayak Nagarkar HR-Consultant
PF , ESI and Insurances components are in nature of Defined Contribution and Short Term Benefits. Defined contribution means premium for coverage of Insurance is predefined, contributions for PF and ESI are already predefined in % terms of Basic Salary and are immediately payable on exit of employee.
For an employee Mr. B, who is getting Rs. 6,500/- as monthly Basic Salary and the insurance premium is predefined:
1st Month..........................................650/-
2nd Month.........................................650/-
3rd Month......................................... 650/-
4th Month......................................... 650/-
5th Month......................................... 650/-
6th Month......................................... 650/-
7th Month......................................... 650/-
8th Month......................................... 650/-
9th Month......................................... 650/-
10th Month....................................... 650/-
11th Month....................................... 650/-
12th Month....................................... 650/-
Now for 12 months, employer has contributed 650*12 = 7,800/- and same is considered as an expense for the year and same is immediately payable to employee, as and when he will leave the Company.
But in case of Gratuity, Gratuity is not predefined as it is computed on the last drawn wages of employee after completion of 5 years or in event of death of employee before completion of 5 years. hence any amount so calculated on monthly basis not be claimed as a part of CTC.

Dear Colleague, Thank you. I do not wish to stretch this any further as I am unable to accept your logic. Regards, Vinayak Nagarkar HR- Consultant
Dear Mr. Tikaram Chaudhary,
Thank you for giving such a detailed information.
I will be thankful to you again, if you could help us know whether we need to keep the employee in scope of Gratuity in following condition :
Policy Secured through LIC :
Retirement Age as per Policy : 60 Years
Condition (1) : Employee crosses 58 years of age
Condition (1) : Employee crosses 60 years of age

In these 2 case where the retirement age is already defined as 60 years, now company has 2 options for both categories.
In case where employee has crossed Age 58, In this case company has two options :-
1. Include their names in list of Gratuity Scheme, get tax benefits for contribution made towards Initial Contribution and get annual contribution till retirement of employee. Interest received by the trust will also be added advantage. Also these employees will get cover of future gratuity including death gratuity in event of death before retirement if investment of trust are done by Insurance Company
2. Exclude the names of employee and pay the Gratuity from your own resources.
For more detail you may send your requirement on my email and call me on 9211637063


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