| Group Gratuity Scheme
Under the Payment of Gratuity Act, 1972, it is employers statutory liability to pay 15 days salary (15/26 of a month's wages) for every completed years service to each of his employees on their exit, for any reason after five years of continuous service, subject to maximum limit of 3.5 lacs. Higher benefits can be paid if the employer so desires. Gratuity payable to the employees can be paid as and when liability arises and can be claimed as deductable expense under P & L A/c of the relevant financial years. However, the sound system of financial management envisages providing for Gratuity liability every year and claiming the tax benefits as it is mandatory as per Accounting Standards 15 (AS15) to account for the liability on Actual basis. This can be done by creating a Trust, managed privately or by LIC and paying the amount to the Trust every year. In case of Privately Managed Trust, investment of funds will have to be done as per Income-Tax Act, by the trustees and entire administration of the Trust including Actuarial Valuation will be the responsibility of the Trustees. In case of LIC managed trust, the job of investment and actuarial valuation is taken over by the corporation free of charge and in addition, interest is paid by the Corporation on the accumulated funds.
We give below the details as to how the Group Gratuity (Cash Accumulation) Scheme provides for a convenient mode of funding the statutory obligation of an employer under the payment of Gratuity Act:
ATTRACTIVE RETURN:
- LIC offers a very attractive rate of interest depending upon the size of the fund
- Employers ordinary annual contribution is allowed as deduction in full in computation of business income as per Section 36(1) (v).
- Employer's initial contribution.
No. limit on amount as per Rule 104.
It is to be paid on the date of setting up of fund in full or in 5 yearly equated instalments from such date.
Deduction to be allowed shall not exceed 8 1/3% of the past salaries as per Rule 104.
Allowed as a deduction in full in computation of business income as per Section 36 (1)(v).
- Benefits to employees Employer's initial and ordinary annual contribution are not treated as taxable perquisites.
- Gratuity is payable in lumpsum only as per Rule 3 of part C of Schedule IV.
- Gratuity is salary and hence taxable, it is taxed under Sec. 17(i) (iii).
- Gratuity is tax free upto half month's average salary (of last 10 months) for each year of service, subject to a maximum of Rs. 3.5 lakhs as per Sec. 10(10).
- While computing tax on gratuity, relief of spreading back available as per Sec. 89(1).
- Other matters.
| a) |
Income of fund exempt from tax |
: Sec .10(25) (iv) |
| b) |
No. deduction is allowed for accounting provision made by Employer for payment of gratuity |
: Sec .40A(7) (a) |
| c) |
Deduction is allowed for provsion made by Employer for payment of contribution to fund for payment for gratuity that has become payable. |
: Sec. 40 A(7) (b) (i) |
| d) |
Contribution by the employer should be
paid to the fund for claiming relief |
: Sec. 43B |
| e) |
Persons deducting tax to furnish
prescribed returns to I.T. authority |
: Sec. 206 |
| f) |
Investment of fund moneys - |
: Rule 67 or LIC's gratuity Scheme Rule 101 |
| g) |
Admission of director to a fund-restricted to those owing not more than 5% of voting rights |
: Rule 102 |
| h) |
Amendment of rules of fund-C.I.T's
prior approval required |
: Rule 110 |
Multi-Employer group are not allowed as per CBDT letter addressed to LIC.
The above scheme, attractive as it is, can be made a part of overall commitment of any progressive employer wedded to Human Resource Development concept.
For more details please contact info@lifeinsurancecorporation.net
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