Thread Started by #TIKARAM CHAUDHARY

An Overview Gratuity Benefits
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 5 years shall not be necessary where the termination of the employment of any employee is due to death or disablement:
Calculation of Gratuity Benefits
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. It means, Gratuity amount will be determined when monthly terminal wages of the employee are known to the company. The terminal wages will include Basic & Dearness allowance only. The Gratuity Benefits are calculated using the following formula:-
(15/26) multiplied by (No of Completed Years on Exit) multiplied by (Terminal Wages)
Factors affecting Gratuity Benefits
Gratuity Benefits changes with the change in the following:-
(a) Past Service of Employee in the Company,
(b) Increase in wages of Employee in the Company,
(c) Change in Benefit Formulae of the Gratuity Benefit due to the amendment in the Act,
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act,
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act,
The impact of the above Factors on Gratuity Benefits can be understood by the following Examples :
(a) Change Past Service of Employee in the Company.
Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month and there is no change in basic salary, only his Past Service Change then Gratuity Payments for the next 5 years will be:-
On Completion of 1 Yr - (15/26)* 2,60,000*1 = 1,50,000/-
On Completion of 2 Yrs - (15/26)*2,60,000*2 = 3,00,000/-
On Completion of 3 Yrs - (15/26)*2,60,000*3 = 4,50,000/-
On Completion of 4 Yrs - (15/26)*2,60,000*4 = 6,00,000/-
On Completion of 5 Yrs - (15/26)*2,60,000*5 = 7,50,000/-
The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.
(b) Increase in wages of Employee in the Company.
Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month and there is the change in wages@10%, then Gratuity Payments for the next 5 years will be :-
On Completion of 1 Yr - (15/26)* 2,86,000*1 = 1,50,000/-
On Completion of 2 Yrs - (15/26)*3,14,600*2 = 3,63,000/-
On Completion of 3 Yrs - (15/26)*3,46,060*3 = 5,98,950/-
On Completion of 4 Yrs - (15/26)*3,80,670*4 = 8,78,460/-
On Completion of 5 Yrs - (15/26)*4,18,730*5 = 12,00,788/-
The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.
(c) Change in Benefit Formulae of the Gratuity Benefit due to the amendment in the Act.
Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month, His increment in wages@10%, and due to change in the Gratuity Factor as 1/1 from 15/26 then Gratuity Payments for next 5 years will be :-

On Completion of 1 Yr - (1/1)*2,86,000*1 = 2,86,000/-
On Completion of 2 Yrs - (1/1)*3,14,600*2 = 6,29,200/-
On Completion of 3 Yrs - (1/1)*3,46,060*3 = 10,38,180/-
On Completion of 4 Yrs - (1/1)*3,80,670*4 = 15,22,660/-
On Completion of 5 Yrs - (1/1)*4,18,730 *5 = 20,93,660/-
The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act.
Mr. A Joins the Company with a Basic Pay of Rs. 5,00,000/- per month, His increment in wages@10%, and due to changes in Ceiling Limit from 10 Lakhs to 20 Lakhs then Gratuity Payments for the next 5 years will be:-

Case 1 - When Ceiling Limit on Gratuity Payment is 10,00,000/-
On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-
On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-
On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/- Company liable to pay 10,00,000/-
On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/- Company liable to pay 10,00,000/-
On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/- Company liable to pay 10,00,000/-
Case 2 - When Ceiling Limit on Gratuity Payment is 20,00,000/-
On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-
On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-
On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/-
On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/-
On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/- Company liable to pay 20,00,000/-
Case 3 - When Ceiling Limit on Gratuity Payment is 30,00,000/-
On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-
On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-
On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/-
On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/-
On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/-
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act.
In the above examples for (a) to (d), If an employee leaves the company before completion of 5 years then "Nil" gratuity benefit is payable in the following events :
(a) on his superannuation, or
(b) on his retirement or resignation.
Case 1 - When Vesting Condition for eligibility is 3 years, Company will be liable to pay gratuity benefit on completion of 3 years in event of his superannuation, on his retirement or resignation.
Case 2 - When Vesting Condition for eligibility is 2 years, Company will be liable to pay gratuity benefit on completion of 2 years in event of his superannuation, on his retirement or resignation.
Case 3 - When Vesting Condition for eligibility is 1 year, Company will be liable to pay gratuity benefit on completion of 1 year in event of his superannuation, on his retirement or resignation.
Gratuity Benefits are long term benefits and are subject to the above changes, so it becomes mandatory for Companies to make Accounting/Investment for Gratuity Benefits. In India companies have 2 options for Accounting/Investment:
(i) Pay as you go option - Where the 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 an employee leaves the organization, company pay gratuity from their resources and get the tax benefit for the gratuity paid.
(ii) Funding Option - In this option, The Company 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.
We have a Team of Litigation Partners, Labor Law Experts, Finance/Insurance Professionals for handling Accounting/Investment for Gratuity Benefits and we have provided consultancy for administration Gratuity Trust Fund/Retirement Trust Fund in various organization in all sectors of Indian Economy on receipt of their Management request and If you wish to know details like:-
1. Who can be covered under Group Gratuity Scheme?
2. Why did companies require to create a Group Gratuity Trust - Decision Making?
3. How can companies administer Gratuity Trust?
4. What are Tax Benefits to Company by setting up Gratuity Trust?
5. What are General Benefits to Employee from a Gratuity Trust Set up by Company ?
6. Where to approach for setting up Gratuity Trust?
7. What is the documentation required for setting up Gratuity Trust?
8. What is the Process of Setting up a Gratuity Trust?
9. Which is beneficial to trustees a Self Managed Investment or Insurance Co. Managed Investment?
10. What is the Accounting requirement for Trustees?
We may also be contacted for other alternate ways the company can choose for the administration of Investment for Retirement Benefits and Long Term Retention Schemes f Productive Employees/Top Management of Companies?

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)
Blog: http://gratuityconsultant.blogspot.com
Website: https://gratuity-trust-fund-consulta...s.site/?m=true
All Consultancy Services provided by us are subject to terms & conditions will be stated when a consultation job is accepted.
(This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.)
9th March 2019 From India, Delhi
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