Why Gratuity Insurance Schemes of Insurers (i.e. LIC, SBI & Bajaj) under Irrevocable Trust approved by the CIT for Companies with 50 Employees ?

Gratuity, as is well known, is a statutory liability of the employer. Also, since Gratuity is calculated on the basis of the last salary drawn, the liability of an employer increases rapidly as years pass on or as the salary of the employees increase. For more details you?may visit my article published at?www.taxguru.com ?for understanding impact of the above Factors on Gratuity Benefits. The web-link for the article is as under :-?https://taxguru.in/income-tax/factors-affecting-gratuity-benefits-accounting-taxation-gratuity-benefits.html ?Organizations with 10 or more employees and Gratuity liability must have the Gratuity liability valued by Actuary and funded separately. Dedicated Gratuity funding is one of the fundamental principles of sound corporate governance.?As a prudent financial practice, as well as for appropriate taxation planning and investment management.?

Companies generally have 2?options for discharging the Gratuity Liability: -

ACCOUNTING OPTION?- This option is called pay as you go option. In this option,?provisioning of Gratuity Liability as Defined Benefit is done?on the basis of Actuarial Report/Certificate issued by an Actuary?(Refer Para 49 of AS 15 (Revised 2005)) and it is mandatory for all Indian companies to comply with ?Accounting Standard 15 (Revised 2005) for Accounting of Gratuity Benefit (i.e. Employee Benefit) as stipulated in Section 133 of the Companies Act, 2013.

FUNDING OPTION?- Accounting Option is mandatory while funding is optional for Indian Companies except companies operating in Andhra Pradesh Telangana & Karnataka but it is preferred by the most reputed Indian & Multinational Companies due to following reasons :-

1. ACCOUNTING FOR GRATUITY LIABILITY IS MANDATORY FOR ALL COMPANIES FOR COMPLIANCE OF AS 15 (REVISED 2005) AS ISSUED BY THE THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) WHILST PREPARING BALANCE AT END OF EACH FINANCIAL?YEAR?BUT THE PROVISION OF GRATUITY LIABILITY MADE IN BALANCE?IS NOT ALLOWED AS DEDUCTION?WHILST COMPUTING NET INCOME OF THE COMPANIES FOR INCOME TAX COMPUTATION?((REFER SECTION 47A (7) OF INCOME TAX ACT 1961)

2. IF COMPANY CREATES AN APPROVED GRATUITY TRUST IN TERMS OF PART C OF SCHEDULE IV OF THE INCOME TAX ACT, 1961.THE INITIAL AND ANNUAL ORDINARY CONTRIBUTION MADE BY COMPANY EQUIVALENT TO PROVISION GIVEN IN ACTUARIAL REPORT INTO AN APPROVED GRATUITY TRUST (SUBJECT TO CONDITION SPECIFIED IN INCOME TAX RULES 103 & 104)?IS?ALLOWED AS DEDUCTIBLE EXPENSE?UNDER?SECTION 36 (1) (V) OF INCOME TAX ACT 1961.ALSO INTEREST RECEIVED FROM INVESTMENT OF AN APPROVED GRATUITY TRUST IS ALSO EXEMPTED AS INCOME UNDER?SECTION 10 (25) (IV)?OF THE INCOME TAX ACT, 1961.?

The establishment of An Approved Gratuity Trust & Actuarial Valuations in compliance of AS 15 (Revised 2005), IndAS 19, IAS 19 (Revised 2005) & USGAAP requires in-depth knowledge of various Rules/Regulations, Acts, Accounting Standards and expertise.

We have a team-leading Professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies having decades of experience. In case of any query or requirement you may contact us at 9211637063, 011-45261651 or email at [email protected] , [email protected]