I hope the below write-up may help you in understanding “Benefits of Formation of an Approved Gratuity Trust ”.
Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. MNC's, Schools and Other business entities) having more than 10 employees . Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.
Gratuity Benefit falls in the category of “Defined Benefits” & amount of Gratuity payable to an employee on his exit from service, according to “ Payment of Gratuity Act 1972”, in force at present, is :-
(Wages of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)
This is subject to a ceiling limit of 20,00,000/-.
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.
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal Benefit. Terminal Benefit means Gratuity amount can be determined only on the monthly terminal wages of the employee on his exit from the Organization after completion of 5 years of Service are available. Also the cost of Gratuity is to be borne by the Organization and not by an employee.
The Cost of Gratuity borne by the Organization Increase with the increase/changes in following:-
(a) Past Service of Employee,
(b) Increase in wages of Employee,
(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in 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 above changes in Gratuity Benefit increases the Cost of Gratuity substantially and company has to borne this cost from his Business capital, if no gratuity trust or group gratuity plan from the Insurance company is opted for this purpose.
It directly affects the profitability of organization’s and hence it becomes necessary for organization’s to form "An approved Gratuity Trust" along with provisions made in the Financial Statement for compliance of AS 15 (Revised 2005) and IndAS 19.
The contributions made by the organisation in the Gratuity on annual basis gets tax benefits under Section 36(1)(v) of the IT Act 1961 , which is not available to companies when they make provision of Gratuity on Annual Basis in their balance sheet in compliance of AS 15 (Revised 2005) and IndAS 19.
I have prepared an example to understand the Mechanism of Provisions made in balance on Accrued Basis and Contributions made in An approved Gratuity Trust. The example is as under :-
Mr. A Joins the Organization with a Basic Pay of Rs. 2,60,000/- per month and basic salary increase given by the Organization to him is assumed to be 10% p.a.
Now Gratuity Payments for next 5 years will be:-
On Completion of 1 Yr - (15/26)* 2,86,000*1 = 1,65,000/-
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)*3,80,666*4 = 8,70,847/-
On Completion of 5 Yrs - (15/26)*4,18,733*5 = 12,07,880/-
Comparison of Tax Benefits under Provisions made in balance on Accrued Basis and Contributions made in an approved Gratuity Trust
(i) Pay as you go option - Where Organization makes a provision of Gratuity in the Financial Statement on the accrual basis taking an actuarial report on closing of Financial Year from an Actuary and as and when Mr. A leaves the organization, Organization 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 - 12,07,880/-
In this case company, Mr. A will leave the Organization then Organization will get the tax benefit of Rs. 12,07,880/-.
(ii) Funding Option - In this option, Organization decides to Setup An approved Gratuity Trust . The Investment of Organization is either "Self Managed " or “ Managed by Insurance Company”. Organization 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 - 2,86,000*12*0.0833 = 2,85,886/-
For Contribution of 2nd Yr - 3,14,600*12*0.0833 = 3,14,474/-
For Contribution of 3rd Yr - 3,46,060*12*0.0833 = 3,45,922/-
For Contribution of 4th Yr - 3,80,666*12*0.0833 = 3,80,514/-
For Contribution of 5th Yr - 4,18,733*12*0.0833 = 4,18,565/-
In this case, Mr. A will get gratuity of Rs. 12,07,880/- from the Gratuity Trust and employer will get approximate Tax Benefits of Rs.1,7,45,360/- for annual contribution made by him in previous 5 years.
If you need any clarification in the above subject then you may avail our services. 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. We help organization in following matters:-
1. Why did companies require creating a Group Gratuity Trust - Decision Making?
2. Who can be covered under Group Gratuity Scheme?
3. How can companies administer Gratuity Trust?
4. What are Tax Benefits to Organization by setting up Gratuity Trust?
5. What are General Benefits to Employee from a Gratuity Trust Set up by Organization ?
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?
Gratuity Trust & Employee Retention Scheme Consultant
(Experienced Consultant with 10 years of exposure in assessment/valuations of Employees Benefit Liabilities specially Gratuity/Leave Encashment Liabilities & Retention Schemes)
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Website: https://gratuity-trust-fund-consulta...business.site/ 1st April 2019 From India, Delhi