Dear Professional Friends,
I hope this post may help you in understanding the Tax Benefit of Creating Gratuity Fund with Insurance Company :-
1. For liabilities like Gratuity, Leave Encashment and other long term employee benefit an Employer has option to fund the for payment of gratuity by setting up an irrevocable Trust and making contributions to the Trust Fund through Insurance Company (With LIC, SBI, HSBC, Etc.) The Gratuity Trust Fund must be approved in terms of Part C of the Fourth Schedule to the Income Tax Act, 1961. If a Trust Fund is set up contributions can be allowed as deduction under section 36 (V) of the Income Tax Act, 1961 as reproduced below:
“any sum paid by the assessee as an employer by way of contribution towards an approved fund created by him for the exclusive benefit of his employees under an irrevocable Trust”. While payment of contribution is allowed as deductible expenditure, gratuity payments will not be allowed as business expenditures since gratuity will be paid out of the Trust Fund.
2. The interest income of the Gratuity Fund is not liable to Income Tax in terms of Section 10 (25) (iv) of the Income Tax Act, 1961 which deals with “Income not included in total income”.
25 (iv) “any income received by the Trustees on behalf of an approved Gratuity Fund”
3. Gratuity Trust Funds are also subject to Part XIV of the Income Tax Rules, 1962. Income Tax Rules 98 to 111 deals with “Approved Gratuity Funds”. Most of the Rules are procedure but more important Rules are reproduced below :
Rule 102 : Admission of directors to a fund
“ Where the employer is a company as defined in clause (i) of sub-section (1) of section 3 of the Companies Act, 1956 (1 of 1956), a director of the company may be admitted to the benefits of the fund only if he is a whole time bonafide employee of the company and does not beneficially own shares in the company carrying more than five per cent of the total voting power.”
Rule 103 : Ordinary annual contribution
The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the Chief Commissioner or Commissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 8 1/3 percent of the salary of
each employee during each year.”
Rule 104 : Initial contributions
“The amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed 8 1/3 percent of the employee’s salary for each year of his past service with the employer.”
Initial contribution in respect of past services was expected to be paid in one lump sum but in terms of relocation, it can be paid in installments over a period not exceeding five years. Annual contributions are restricted to 8 1/3 % of current salary although gratuity is payable on final salary.
The above tax benefit as stated in (vi) above is not available to the companies who make the accounting provision of Gratuity in their Balance Sheet as per the provisions of Accounting Standard-15 (Revised 2005) and IndAS 19.
We have almost 10 years of experience in providing services for Creating Group Gratuity Trust Fund & Calculation of Gratuity Liability as per the rules and regulation of "The Payment of Gratuity Act 2010 amended" and Technical/legal issues involved of the Payment of Gratuity Act . Our team consist of Leading Professional Legal Advisors, Chartered Accountants and Heads of Insurance Companies. If you wish to avail our consultancy services to create a Gratuity Trust Fund, you may call us at 9211637063 for your query.
I hope this post may help you in understanding the Tax Benefit of Creating Gratuity Fund with Insurance Company :-
1. For liabilities like Gratuity, Leave Encashment and other long term employee benefit an Employer has option to fund the for payment of gratuity by setting up an irrevocable Trust and making contributions to the Trust Fund through Insurance Company (With LIC, SBI, HSBC, Etc.) The Gratuity Trust Fund must be approved in terms of Part C of the Fourth Schedule to the Income Tax Act, 1961. If a Trust Fund is set up contributions can be allowed as deduction under section 36 (V) of the Income Tax Act, 1961 as reproduced below:
“any sum paid by the assessee as an employer by way of contribution towards an approved fund created by him for the exclusive benefit of his employees under an irrevocable Trust”. While payment of contribution is allowed as deductible expenditure, gratuity payments will not be allowed as business expenditures since gratuity will be paid out of the Trust Fund.
2. The interest income of the Gratuity Fund is not liable to Income Tax in terms of Section 10 (25) (iv) of the Income Tax Act, 1961 which deals with “Income not included in total income”.
25 (iv) “any income received by the Trustees on behalf of an approved Gratuity Fund”
3. Gratuity Trust Funds are also subject to Part XIV of the Income Tax Rules, 1962. Income Tax Rules 98 to 111 deals with “Approved Gratuity Funds”. Most of the Rules are procedure but more important Rules are reproduced below :
Rule 102 : Admission of directors to a fund
“ Where the employer is a company as defined in clause (i) of sub-section (1) of section 3 of the Companies Act, 1956 (1 of 1956), a director of the company may be admitted to the benefits of the fund only if he is a whole time bonafide employee of the company and does not beneficially own shares in the company carrying more than five per cent of the total voting power.”
Rule 103 : Ordinary annual contribution
The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the Chief Commissioner or Commissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 8 1/3 percent of the salary of
each employee during each year.”
Rule 104 : Initial contributions
“The amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed 8 1/3 percent of the employee’s salary for each year of his past service with the employer.”
Initial contribution in respect of past services was expected to be paid in one lump sum but in terms of relocation, it can be paid in installments over a period not exceeding five years. Annual contributions are restricted to 8 1/3 % of current salary although gratuity is payable on final salary.
The above tax benefit as stated in (vi) above is not available to the companies who make the accounting provision of Gratuity in their Balance Sheet as per the provisions of Accounting Standard-15 (Revised 2005) and IndAS 19.
We have almost 10 years of experience in providing services for Creating Group Gratuity Trust Fund & Calculation of Gratuity Liability as per the rules and regulation of "The Payment of Gratuity Act 2010 amended" and Technical/legal issues involved of the Payment of Gratuity Act . Our team consist of Leading Professional Legal Advisors, Chartered Accountants and Heads of Insurance Companies. If you wish to avail our consultancy services to create a Gratuity Trust Fund, you may call us at 9211637063 for your query.
Tikaram Chaudhary
Group Gratuity Trust Fund Consultant
Email ID - tikaramchaudhary@gmail.com
Mobile Number - 9211637063
Linkedin Profile - https://www.linkedin.com/in/tikaram-chaudhary-a5727848/
Caclubindia Profile - https://www.caclubindia.com/profile.asp?member_id=1446582
