Benefits of Creating Group Gratuity Trust Fund with Insurance Company

Gratuity being an important retirement benefit to employees in the Indian context, is relevant for all organizations (i.e. MNC's, Schools and Other business entities) having more than 10 employees . Since an employee sacrifices prime time of his life for the development, prosperity and betterment of his employer, employer pays his employee gratuity as a graciousness or gift to him, when he no longer serves him.

Gratuity Benefit falls in the category of “Defined Benefits” & amount of Gratuity payable to an employee on his exit from service, according to “ Payment of Gratuity Act 1972”, in force at present, is  :-

(Salary of the employee at the time of exit) x (15/26) x (Number of Years of Service at the time of exit)

This is subject to a ceiling limit of 20,00,000/-.

Gratuity is payable to an employee on exit from service after he has rendered continuous service for not less than five years:

    (a) On his superannuation
    (b) On his resignation
    (c) On his death or disablement due to employment injury or disease.

In case of (c) vesting condition of 5 years does not apply.

Gratuity Benefits depends upon last drawn monthly wages and is linked to length of service, normally it goes on increasing from the time when the employee joins service and the time of his exit from service due to annual increase in salary and increasing service period.


Let us take example of employee and understand the Impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Benefits payable to him on his date of retirement. The particulars of  employee are as under :-

Name of Employee........................................ Mr. Bhanu Pratap
Date of Birth.................................................. 31.03.1984
Date of Joining............................................... 31.03.2008
Basic Salary on 31.03.2017........................... 5200/-
Retirement Age.............................................. 60 Years
Annual Salary Increase.................................. 8% p.a.
       
Calculation of Gratuity Payable on 31.03.2017    
       
Age on 31.03.2017...............................................    33
Completed years of Service.................................. 10
Remaining Service Period upto Retirement........ 27
Gratuity Factor....................................................... 15/26
Ceiling Limit on Gratuity...................................... 10,00,000/-
       
Gratuity Payable = (15/26) x No of Completed years of Service Upto 31.03.2017 x Basic Salary
                            = (15/26) x 10 x 5200
                            =30,000/-

Table showing the Impact of Annual Increase in Salary and Increasing Service Period on Gratuity Payable to Mr. Bhanu Pratap on 31.03.2017 & on his retirement.
Year	Gratuity Payable Date	Expected Basic Salary increased by 8% p.a.	Expected Service Period	Gratuity Factor	Expected Gratuity Payable
0	31.03.2017	5200	10	15/26	30000
1	31.03.2018	5616	11	15/26	35640
2	31.03.2019	6065	12	15/26	41990
3	31.03.2020	6551	13	15/26	49129
4	31.03.2021	7075	14	15/26	57141
5	31.03.2022	7641	15	15/26	66120
6	31.03.2023	8252	16	15/26	76170
7	31.03.2024	8912	17	15/26	87405
8	31.03.2025	9625	18	15/26	99950
9	31.03.2026	10395	19	15/26	113943
10	31.03.2027	11226	20	15/26	129535
11	31.03.2028	12125	21	15/26	146893
12	31.03.2029	13094	22	15/26	166199
13	31.03.2030	14142	23	15/26	187654
14	31.03.2031	15273	24	15/26	211478
15	31.03.2032	16495	25	15/26	237913
16	31.03.2033	17815	26	15/26	267224
17	31.03.2034	19240	27	15/26	299701
18	31.03.2035	20779	28	15/26	335666
19	31.03.2036	22442	29	15/26	375466
20	31.03.2037	24237	30	15/26	419486
21	31.03.2038	26176	31	15/26	468147
22	31.03.2039	28270	32	15/26	521908
23	31.03.2040	30532	33	15/26	581275
24	31.03.2041	32974	34	15/26	646800
25	31.03.2042	35612	35	15/26	719090
26	31.03.2043	38461	36	15/26	798806
27	31.03.2044	41538	37	15/26	886675

From above example it is clear that there is a bearing impact of "Annual Increase in Salary and Increasing Service Period" on Gratuity Payable to employee on 31.03.2017 and on his retirement. If we calculate the impact from the above example, Gratuity payable to Mr. Bhanu Pratap on Retirement @ a increased salary of 8% p.a. compounded with his increased service period up to retirement is 8,86,675/- which is 29.55 times the Gratuity Payable to him on 31.03.2017 (i.e. 30,000/-).

It is also understood from the above working that gratuity benefits payable to employees in future years has a bearing Impact of Annual Increase in Salary and Increasing Service Period, hence it is advisable to MNC's, Schools, Private Universities, Private Companies to start an early Investment by creating a Gratuity Trust either by Self Managed or though Insurance Company to mitigate the effect of "Annual Increase in Salary and Increasing Service Period" on Gratuity Payable to employees in future.

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

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