Gratuity Payment on Employee Separation: Is a Trust Necessary or Can Companies Pay Directly?

Is it compulsory to have trust to make the gratuity payment to the employee on separation, or can we pay directly from the company?

Thanks,
Nisha

Gratuity Payment Methods

You can do it both ways. See this.

For every completed year of service or part thereof in excess of 6 months, the employer shall pay gratuity to an employee at the rate of 15 days' wages based on the rate of wages last drawn by the employee concerned.

Calculation of Gratuity

According to the explanation under section 4(2), if the wages are paid monthly, then the per day wage for the purpose of calculating gratuity will be calculated as follows:

Salary/Wages for Gratuity = Rate of Monthly Wage Last Drawn * 15 / 26

In the case of an employee paid on a piece-rate basis, daily wages are computed as the average of total wages received in a period of 3 months immediately preceding the date of termination. For this purpose, the wages paid for any overtime work shall not be taken into account.

For an employee employed in a seasonal establishment and not employed throughout the year, the employer shall pay the gratuity at the rate of seven days' wages for each season.

The amount of gratuity payable to an employee shall not exceed ten lakh rupees.

For more information, please visit http://www.shramsamadhan.com/p/payme...act-rules.html

Compulsory Insurance of Gratuity Fund

Section 4A of the Payment of Gratuity Act provides for the compulsory insurance of the gratuity fund. Every employer is expected to have a board of trustees for an approved gratuity fund. This fund is constituted by contributions from the employer to LIC every year. When an eligible employee leaves, the payment is made from the trust. Invariably, LIC will issue a cheque for the amount of gratuity to the Trust.

However, this section is enforced state-wise, and only a few states, like Kerala, have notified the date of bringing this provision into effect. Therefore, if your state has not notified the implementation date of this section, you are not obligated to have a trust. Instead, a yearly provision towards gratuity liability based on actuarial valuation is sufficient. This complies with the mandate of new Accounting Standards.

Employers falling under the above category can make direct payments of gratuity to their employees.

Advantages and Drawbacks of Having a Gratuity Trust

Under the first option, there are some advantages. For instance, the employer does not need to worry about liquidity when there are a few employee exits. Additionally, there can be an option for a death cum gratuity scheme. By paying a small additional premium, the benefit payable in the event of an employee's death before reaching the age of superannuation can be determined based on projected salary and service, etc. The drawback, however, is the requirement to pay the premium annually. At the same time, the premium paid for employees who leave without qualifying for gratuity or serving the company for at least 5 years will remain in the fund. Subsequently, the next year's premium will be calculated based on this amount available in the fund. In the second case, only a provision is required to be made in the books of accounts.

Regards, Madhu.T.K