Greetings for the day. I have a question on gratuity. Though this subject has been discussed at length in the CTHR many times, and I have gone through those discussions, I could not find the appropriate answers to the following points.
Gratuity Fund Management
Is it mandatory to set aside the gratuity funds with the LIC or any other trust from the inception?
Gratuity Payment to Employees
Can the employer pay the gratuity to outgoing employees when they leave the organization?
Gratuity Deduction from CTC
Can the gratuity amount be legally deducted on a monthly basis from employees as part of their CTC?
LIC Scheme and Installments
In case we opt for the LIC scheme, is it possible to switch the entire contribution to the LIC in installments? If yes, how many installments are allowed to pay the previous dues?
Our company is planning to pay the gratuity to outgoing employees on a case-by-case basis when it really becomes due.
I sincerely seek your help to get this implemented in our company. Kindly update.
Many Thanks,
Poonam Gandhi
From India, Delhi
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1Gratuity Fund Management
Is it mandatory to set aside the gratuity funds with the LIC or any other trust from the inception?
Gratuity Payment to Employees
Can the employer pay the gratuity to outgoing employees when they leave the organization?
Gratuity Deduction from CTC
Can the gratuity amount be legally deducted on a monthly basis from employees as part of their CTC?
LIC Scheme and Installments
In case we opt for the LIC scheme, is it possible to switch the entire contribution to the LIC in installments? If yes, how many installments are allowed to pay the previous dues?
Our company is planning to pay the gratuity to outgoing employees on a case-by-case basis when it really becomes due.
I sincerely seek your help to get this implemented in our company. Kindly update.
Many Thanks,
Poonam Gandhi
From India, Delhi
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1) It's not mandatory to keep funds with LIC or any other fund managers. Companies do it to get expenses allowed by the Income Tax. As per income tax regulations, if gratuity contributions are kept with an approved trust, then expenses can be claimed in the Income Tax return. If one keeps gratuity contributions with themselves, then in the Income Tax filing, expenses will be allowed once gratuity is actually paid.
These fund managers also provide life insurance equal to the gratuity benefit for the staff.
2) A company has to pay gratuity to those employees who have served 5 or more years at the time of leaving the company. In the case of death, gratuity is paid even if the employee has not completed 5 years.
3) Some companies show gratuity as part of CTC. But I think it cannot be deducted from the employee's gross salary.
4) When you switch over for 'gratuity fund management' for the first time in the company and the company is already in business for years, a lot of contribution is demanded by the fund manager on account of previous contributions. This previous contribution is calculated by the actuary. It depends on how much contribution out of that, the company wants to give to the fund manager. So please discuss with your fund manager and pay the contribution as per the agreed terms.
5) Some companies with high staff turnover, like the IT sector, reject the valuation of the actuary, as they believe it does not provide fair value. However, as per Accounting Standard 15 issued by ICAI, provision for gratuity will be made in the books of accounts on the actuarial basis. So it is always good to get your gratuity valued by an actuary in a real scenario.
6) Please cross-check the same before implementation. I also request experts to correct me if I am wrong.
Thank you
From India, New Delhi
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These fund managers also provide life insurance equal to the gratuity benefit for the staff.
2) A company has to pay gratuity to those employees who have served 5 or more years at the time of leaving the company. In the case of death, gratuity is paid even if the employee has not completed 5 years.
3) Some companies show gratuity as part of CTC. But I think it cannot be deducted from the employee's gross salary.
4) When you switch over for 'gratuity fund management' for the first time in the company and the company is already in business for years, a lot of contribution is demanded by the fund manager on account of previous contributions. This previous contribution is calculated by the actuary. It depends on how much contribution out of that, the company wants to give to the fund manager. So please discuss with your fund manager and pay the contribution as per the agreed terms.
5) Some companies with high staff turnover, like the IT sector, reject the valuation of the actuary, as they believe it does not provide fair value. However, as per Accounting Standard 15 issued by ICAI, provision for gratuity will be made in the books of accounts on the actuarial basis. So it is always good to get your gratuity valued by an actuary in a real scenario.
6) Please cross-check the same before implementation. I also request experts to correct me if I am wrong.
Thank you
From India, New Delhi
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Could anyone share the legal sanctity on the following: What if the employer does not pay for the gratuity to the outgoing employees? What if the employer shifts the eligible employees from one company to another? I would appreciate if the seniors could come forward and update the right thing.
Regards,
Poonam
From India, Delhi
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Regards,
Poonam
From India, Delhi
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In gratuity act Form F use for nomination for dependents and form H for modification in dependents nomonation. For Information purpose.
From India, Mumbai
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From India, Mumbai
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Please cross check the same before implementation. I also request experts to correct me if I am wrong. Thx
From India, Mumbai
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From India, Mumbai
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Dear Sir,
I have a doubt. If registering gratuity from an approved insurer is not compulsory, what does Section 4A compulsory insurance provide for? I came across this section when I was reading the Gratuity Act 1972.
From China
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I have a doubt. If registering gratuity from an approved insurer is not compulsory, what does Section 4A compulsory insurance provide for? I came across this section when I was reading the Gratuity Act 1972.
From China
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What Sandeep has answered is absolutely right. Further clarifications:
a) Gratuity cannot be deducted from an employee's salary.
b) If the employer does not pay the eligible employee upon separation, legal action can be initiated. Only in cases of proven misconduct through an inquiry can the gratuity be forfeited.
c) Regardless of employees being shifted from one company to another under the same employer, there will be continuity of service.
Kind regards,
Dayanand L. Guddin
From Singapore, Singapore
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a) Gratuity cannot be deducted from an employee's salary.
b) If the employer does not pay the eligible employee upon separation, legal action can be initiated. Only in cases of proven misconduct through an inquiry can the gratuity be forfeited.
c) Regardless of employees being shifted from one company to another under the same employer, there will be continuity of service.
Kind regards,
Dayanand L. Guddin
From Singapore, Singapore
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Yes, Section 4A of the Payment of Gratuity Act 1972 states that in most cases, the employer should obtain life insurance for gratuity. However, it does not specify that the gratuity fund must be compulsorily invested with such a life insurance company.
Thank you,
Sandeep
From India, New Delhi
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Thank you,
Sandeep
From India, New Delhi
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Payment of Gratuity Amendment Bill: Effective Date Clarification
Recently, the Payment of Gratuity Amendment Bill has been passed by the Parliament, and it shall come into force on such date as the central government may specify through notification in the official Gazette. Does this mean that the effective date of this bill is on the date of notification or any retrospective date?
Regards,
K.V. Aravindakshan
From India, Kochi
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Recently, the Payment of Gratuity Amendment Bill has been passed by the Parliament, and it shall come into force on such date as the central government may specify through notification in the official Gazette. Does this mean that the effective date of this bill is on the date of notification or any retrospective date?
Regards,
K.V. Aravindakshan
From India, Kochi
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I agree with Sandeep & Mr. Dayanand. I have a case and would like to know from our friends whether an employee, upon resigning from a company in one position and immediately joining the same company in a higher position, will be eligible for gratuity. This type of situation arises in public sector banks when an employee, after being selected for a higher position through an advertised post, has to resign from their earlier position and join afresh. Although there is generally no break in service and the individual has worked for more than 5 years in the previous position, should they be paid gratuity? What about the payment of PF? Can an employee receive two or more gratuity payments from the same employer?
Members are requested to enlighten on this.
Regards,
PV
From India, Mumbai
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Members are requested to enlighten on this.
Regards,
PV
From India, Mumbai
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Gratuity Fund Management and Compliance
Gratuity Fund has to be created by a deed and registered for the management of funds and authority:
1. Opening of a Gratuity Fund account with a Nationalized Bank.
2. Valuation done by an Authorized Actuary: You need to furnish a statement of employees with their date of birth, date of joining, and monthly salary details. Provide a column for the actuary to fill in the gratuity accrued to them as per the Gratuity Act.
3. Before the company's year-end accounts, you must provide the provision of gratuity in the books of accounts. Before its due date, that money should be deposited into the Gratuity Fund account you maintain with a Nationalized Bank.
4. From next year, every year you will send the statement before the year-end and get the valuation done. The total gratuity provision as per the new statement will show how much has already been created. You will now provide the difference and transfer the funds to the Gratuity Fund account. For instance, if the previous year's valuation shows Rs.1,85,000/- and the new valuation shows Rs.2,25,000/-, then the difference of Rs.40,000/- will be the current year gratuity provision you have to pay into the current account of the Gratuity Fund Account with the Nationalized Bank. Unless this money is paid before the due date, Income Tax will not allow this as a deduction. So, payment of money into the Gratuity Fund account with proof is mandatory.
How to Manage the Gratuity Fund Account
There is a statutory provision for the investment of Gratuity Fund money in authorized securities. You will get a copy from the actuary, who will guide you.
1. Invest this amount in the manner (%) prescribed by the act and rules of the Gratuity Act. They will say 40% in Central or State Government Securities, another in other forms of security; 40% in a special account with the Nationalized Bank itself as per the Gratuity Act. The balance in the current account, say 20%, to make the 100%. You have to check if the listed investments are authorized under the Gratuity and eligible securities. Otherwise, it is not an authorized investment under the Gratuity Act and Rules.
You have to manage the funds: If an employee leaves the organization, you will calculate the amount as per Gratuity Payment Rules. This has nothing to do with the amount of actuary valuation done by the actuary. Actuarial valuation is only a provision under the act for payment of funds from the company account to the Gratuity Fund Account. This cannot be reversed.
Now you will calculate the amount due to the employee Rs........... Now you will look for the amount in the current account Rs.............. If this amount is sufficient to pay to the employee, then you will give a check for the amount due to him and take a payment voucher under XYZ COMPANY LTD.-GRATUITY FUND ACCOUNT.
If there is a shortage of funds, then you first transfer some amount from the company account to the Gratuity Fund and then pay the due amount to the employee.
At the year-end, you will remove the employee's name from the list altogether. No need to show his name at all. Thereby, the new provision will be available from the actuary.
At the year-end: Then now look into your as of date: (what is actually available) List of Investments: Rs............... Add: Interest Received Rs................ Balance in the GF-Current Account Rs............... Total of all the above. Rs............... New Provision as per the list Rs............... The difference will be now further transferred to the Gratuity Fund Account.
Like companies' accounts are audited, the audit of the Gratuity Fund Account is also to be done, and an audit certificate is to be obtained.
Gratuity Fund is an independent entity, and every action, investment, etc., are to be minuted in the minutes of the meeting of trustees of the fund, and a resolution is to be passed.
Authorized signatories for investment and bank accounts are to be made with any two trustees signing the documents and operating the bank accounts and investment funds.
Payment to an employee is also to be resolved in the meeting, and a copy kept in records with the proper signatory of trustees.
The main issue is the Gratuity Fund is a separate account, and these funds cannot be misused. Close monitoring of the investments and getting the interest warrants and follow-up if not received. Change in trustees due to retirement, death, and other reasons to be minuted and change of authorized trustees to be circulated and recorded for all investments wherever necessary.
Regards,
Ramakrishnan Sarma
From Saudi Arabia
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Gratuity Fund has to be created by a deed and registered for the management of funds and authority:
1. Opening of a Gratuity Fund account with a Nationalized Bank.
2. Valuation done by an Authorized Actuary: You need to furnish a statement of employees with their date of birth, date of joining, and monthly salary details. Provide a column for the actuary to fill in the gratuity accrued to them as per the Gratuity Act.
3. Before the company's year-end accounts, you must provide the provision of gratuity in the books of accounts. Before its due date, that money should be deposited into the Gratuity Fund account you maintain with a Nationalized Bank.
4. From next year, every year you will send the statement before the year-end and get the valuation done. The total gratuity provision as per the new statement will show how much has already been created. You will now provide the difference and transfer the funds to the Gratuity Fund account. For instance, if the previous year's valuation shows Rs.1,85,000/- and the new valuation shows Rs.2,25,000/-, then the difference of Rs.40,000/- will be the current year gratuity provision you have to pay into the current account of the Gratuity Fund Account with the Nationalized Bank. Unless this money is paid before the due date, Income Tax will not allow this as a deduction. So, payment of money into the Gratuity Fund account with proof is mandatory.
How to Manage the Gratuity Fund Account
There is a statutory provision for the investment of Gratuity Fund money in authorized securities. You will get a copy from the actuary, who will guide you.
1. Invest this amount in the manner (%) prescribed by the act and rules of the Gratuity Act. They will say 40% in Central or State Government Securities, another in other forms of security; 40% in a special account with the Nationalized Bank itself as per the Gratuity Act. The balance in the current account, say 20%, to make the 100%. You have to check if the listed investments are authorized under the Gratuity and eligible securities. Otherwise, it is not an authorized investment under the Gratuity Act and Rules.
You have to manage the funds: If an employee leaves the organization, you will calculate the amount as per Gratuity Payment Rules. This has nothing to do with the amount of actuary valuation done by the actuary. Actuarial valuation is only a provision under the act for payment of funds from the company account to the Gratuity Fund Account. This cannot be reversed.
Now you will calculate the amount due to the employee Rs........... Now you will look for the amount in the current account Rs.............. If this amount is sufficient to pay to the employee, then you will give a check for the amount due to him and take a payment voucher under XYZ COMPANY LTD.-GRATUITY FUND ACCOUNT.
If there is a shortage of funds, then you first transfer some amount from the company account to the Gratuity Fund and then pay the due amount to the employee.
At the year-end, you will remove the employee's name from the list altogether. No need to show his name at all. Thereby, the new provision will be available from the actuary.
At the year-end: Then now look into your as of date: (what is actually available) List of Investments: Rs............... Add: Interest Received Rs................ Balance in the GF-Current Account Rs............... Total of all the above. Rs............... New Provision as per the list Rs............... The difference will be now further transferred to the Gratuity Fund Account.
Like companies' accounts are audited, the audit of the Gratuity Fund Account is also to be done, and an audit certificate is to be obtained.
Gratuity Fund is an independent entity, and every action, investment, etc., are to be minuted in the minutes of the meeting of trustees of the fund, and a resolution is to be passed.
Authorized signatories for investment and bank accounts are to be made with any two trustees signing the documents and operating the bank accounts and investment funds.
Payment to an employee is also to be resolved in the meeting, and a copy kept in records with the proper signatory of trustees.
The main issue is the Gratuity Fund is a separate account, and these funds cannot be misused. Close monitoring of the investments and getting the interest warrants and follow-up if not received. Change in trustees due to retirement, death, and other reasons to be minuted and change of authorized trustees to be circulated and recorded for all investments wherever necessary.
Regards,
Ramakrishnan Sarma
From Saudi Arabia
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