| Insurance >> Group Schemes >> Group Gratuity Scheme |
| Under the Payment of Gratuity Act, 1972, it is employer's statutory liability to pay 15 days salary (15/26 of a month's wages) for every completed year of service to each of his employees on their exit, for any reason after five years of continuous service. Higher benefits can be paid if employer so desires. Gratuity payable to employees can be paid as and when liability arises and can be claimed as deductible expense under P&L A/C. of the relevant financial year. However, the sound system of financial management envisages providing for Gratuity liability every year and claiming the tax benefits . 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 LIC free of charge and in addition, interest is paid by LIC on the accumulated funds. |
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| 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 and also the benefits which the employer will derive by adopting the LIC's Scheme. |
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- LIC offers a very attractive rate of interest depending upon the size of the fund. The rate of interest declared for the year 2007-08 varies from 9.00% to 9.55% depending upon the size of the Fund. Chart below shows the rate of interest and size of the Fund for the last 5 years :
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| Interest Rates for 2003 - 2004 |
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Fund Size |
Rate of Interest |
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2003-04 |
2004-05 |
2005-06 |
2006-07 |
2007-08 |
Below Rs. 25 Lakhs |
7.55 |
7.40 |
7.90 |
8.70 |
9.00 |
Rs. 25 Lakhs but less than Rs. 1 Crore |
7.85 |
7.55 |
8.10 |
8.90 |
9.15 |
Rs. 1 Crore but less than Rs. 5 Crores |
8.15 |
7.75 |
8.20 |
9.00 |
9.25 |
Rs. 5 Crores or more but less than Rs. 10 Crores |
8.30 |
7.75 |
8.20 |
9.00 |
9.30 |
Rs. 10 Crores or more but less than Rs. 50 Crores |
8.50 |
7.95 |
8.30 |
9.10 |
9.35 |
Rs. 50 Crores or more but less than Rs. 100 Crores |
8.75 |
8.05 |
8.40 |
9.10 |
9.40 |
| Rs. 100 Crores or more but less than Rs. 400 Crores |
9.00 |
8.20 |
8.50 |
9.20 |
9.45 |
Rs. 400 Crores or more but less than Rs. 800 Crores |
9.00 |
8.20 |
8.55 |
9.25 |
9.50 |
Rs. 800 Crores or more |
9.00 |
8.20 |
8.55 |
9.30 |
9.55 |
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- There would be no occasion for keeping the funds idle for investments as we give credit from the date of receipt of contribution from the employer and the funds start earning interest from that very date
- Each year amount to be funded is arrived at on the basis of fresh data of employees supplied and from this amount EXISTING FUND along with accumulated interest is subtracted
- When the fund is handed over to LIC, Trustees will not be required to obtain the certificate from outside Actuary since the valuation done by LIC would suffice for the purpose of claiming Income Tax rebate
- The Trustees would not have to bother about the investment of the funds as that aspect would be taken care of by LIC once the funds are handed over to it
- We take over the day to day administration of the Scheme with no administrative cost. The administrative job, people involved in investment matters and actuarial valuation, all these works increase the cost of management. Alternatively, if the management of fund is given to LIC, the actuarial valuation is done by LIC free of charge and also the other costs gets reduced
- The Trustees will perform the statutory roles as envisaged in the Act. However, in view of the above points considerable work would be attended to by LIC on behalf of the Trustees
- There is no deduction of servicing cost either from the interest declared or the Fund. Your Organisation can save the fund management cost
- The calculation of benefits will be as per the Rules of the Scheme framed by the Employer / Trustees, from time to time. In short, it will be tailored to suit the requirements of the Clients
- LIC's Scheme of Insurance is an approved pattern of Investment (Refer Rule 101 of Income Tax Rules, 1962) and hence there are no complications from Income Tax / Legal point of view
- The Fund Manager (LIC of India) will be issuing following Statements / Certificates to facilitate smooth functioning of the Scheme as well as providing relevant information to the Trustees / Employer
- Year End Fund Statement to be issued every year after the books are closed. Generally this Statement is issued by first week of April every year giving complete details of the movement of the Fund - viz. Opening Balance, Receipts, Settlements, Interest Credited & Closing Balance - under each Scheme
- AS - 15 Certification for each Scheme, as per the provisions of Accounting Standard 15 - given for the purpose of audit to check up the adequacy / solvency of the Fund
- Actuarial Valuation Report - for each Scheme based on the Data received from the Employer / Trustees. This statement is given generally at the time of Renewal of the Scheme, however, special favour can be extended to accommodate Actuarial Valuation for making specific provisions of liability / liabilities at the year end. This facility is extended free of cost
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| Life Cover - An Added Attraction |
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| A unique feature of our scheme is to provide, in the event of unfortunate premature death, a sum equal to the gratuity payable in respect of the entire service (actual and anticipated). This is in sharp contrast to the benefits payable only for the actual service under other methods of funding / paying gratuity. This Life Cover benefit is secured at a low cost through ONE YEAR RENEWABLE GROUP TERM ASSURANCE PLAN (OYRGTA). |
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| Example |
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| An employee joined the service at age |
28 Years |
| Retirement Age |
58 Years |
| Expected Service Span |
30 Years |
| Death at Age |
33 years |
| Service Completed |
5 Years |
| Balance (anticipated service) |
25 Years |
| Salary at the time of death |
Rs. 20,000/- Per Month |
| Gratuity on the accrued basis (For the period Employee Lived |
Rs. 20,000 x 15/26 x 5 = Rs. 57,692.31 |
| Gratuity on the anticipated basis |
Rs. 20,000 x 15/26 x 30 = Rs. 3,46,153.86 |
| Death Claim |
Rs. 2,88,461.55 |
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| Life cover is based on salary as at annual renewal date. |
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| Special Features |
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The employer has to pay an initial contribution at the inception of the scheme to secure past service gratuity. The LIC determines contribution payable as annual premium, under the policy, on the basis of an actuarial valuation of the gratuity liability subject to the statutory limit of 8.33% of the annual wage bill taking into consideration the relevant factors. When the Trustees pay the contribution under the policy, the amount required towards the premium for life insurance benefit is utilized first and balance is credited to the running account of the scheme which accumulates at an interest of 9.00% p.a. to 9.55% p.a. depending upon the fund size.
When the contingency of payment of gratuity arises the necessary amount is withdrawn from the running account for making payment. Upon a claim arising by death the gratuity pertaining to the past service is withdrawn from the running account and the balance is paid from LIC's life fund.
The maximum cover will depend on the No. of Employees in the Organization and will be as follows:- |
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| Gruop Size |
Scale of Cover |
Max. limit of Cover as per ACT (Rs.) |
Free limit of Cover (Rs.) (Without Medical Examination) |
10 - 49 |
15/26 Months Salary for each year of future service on death subject to maximum limit |
1.75 Lakh |
1.75 Lakhs |
50 & More |
15/26 Months Salary for each year of future service on death subject to maximum limit |
3.50 Lakhs |
4.50 Lakhs |
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| How is the Scheme Installed? |
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- To enable us to give you exact quotation, kindly send the information like (a) Name of the employee
(b) Date of Birth (c) Date of Joining (d) Salary (Basic + DA) & (e) Retirement Age, preferably by Email / CD / Floppy
- Get the resolution passed by the Board of the Company for opting for the LIC of India's Group Gratuity Cash Accumulation Scheme
- Appoint Trustees (minimum 2) for administering the scheme, draft the Trust Deed and Rules in consultation with LIC of India and executive the Trust Deed to establish an irrevocable trust
- Make an application to the Commissioner of Income Tax for approval under Part 'C' of the Fourth Schedule of the Income Tax Act, 1961 and
- Forward to LIC of India Master Proposal Form (Form No. 6200) signed by the Trustees, the employees data in the prescribed form, copies of Trust Deed and Rules and cheque towards payment of premium
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| LIC of India will offer necessary guidance to the employer in drawing up the Trust Deed and Rules of the Gratuity Scheme and other documents. |
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| Employer's Initial Contribution |
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- No limit on amount
- It is to be paid on the date of setting up of Fund
- Deduction to be allowed shall not exceed 8.33% of the past salaries
- Allowed as a deduction in full in computation of Business Income (CBDT Circular No. 14 dated 23.04.1969)
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| Legal & Taxation Aspects |
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The provisions relating to approved Gratuity Funds are set out in Part 'C' of the Fourth Schedule of the Income Tax Act, 1961 and part XIV of the Income Tax Rules, 1962.
The list of important aspects and the relevant rules / sections dealing with these aspects and clauses in the Model Trust Deed / Rules of LIC of India are detailed below : |
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- Employer's annual contribution or premium paid up to 8.33% of Salary shall be treated as expenses of management and shall be exempt from tax. This amount shall also not be treated as income or perquisites in the hands of the employee [Sec. 36(1)(V)]
- Interest earned on Fund is exempt from Income Tax
- No deduction is allowed for accounting provision made by Employer for payment of Gratuity. [Sec. 40A(7)(a)]
- Deduction is allowed for provision made by Employer for payment of contribution to Fund or payment of Gratuity that has become payable. [40A(7)(b)(i)]
- Contribution by the Employer should be paid to the Fund for claiming relief. [Sec. 43B]
- Gratuity is payable in lumpsum only. [Rule 3 of Part C of Schedule IV]
- Gratuity is salary and hence taxable. It is taxed on due basis [Sec. 17]. But Under Section 10(10)(iii) and 10(10)(ii) gratuity upto Rs. 3.50 Lakhs is exempt from Income Tax
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| LIC's Investment Policy |
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| Investment Pattern of LIC of India |
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- The investments of LIC are governed by Section 27 of the Insurance Act, 1938.
- Investment Norms for LIC : Pension & Group Scheme Business
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| Sr No. |
Type of Investment |
IRDA Norm |
| 1 |
Central Government Securities |
Not less than 20% |
| 2 |
Govt. Securities or other approved Securities (including (1) above) |
Not less than 45% |
| 3 |
Balance in Approved Investments |
Not exceeding 35% |
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| Our investment portfolio is totally transparent. We invest our surplus ensuring the safety and security of the fund. |
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| LIC of India's Investments as on 31.03.2008 |
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| Sr No. |
Type of Investment |
Amount (Rs in Crs.) |
| 1 |
Central Government Securities |
2,74,703.00 |
| 2 |
Govt. Securities or other approved Securities (including (1) above) |
1,09,138.00 |
| 3 |
Balance in Approved Investments |
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a) Infrastructure and Social Sector |
71,016.00 |
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b) Others |
1,57,848.00 |
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Total Investments |
6,12,705.00 |
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| Sovereign Guarantee |
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| The most important aspect above all is SECURITY OF THE FUNDS INVESTED since these are EMPLOYEE WELFARE FUNDS. Funds invested with the Corporation (LIC) enjoy SOVEREIGN GUARANTEE from GOVERNMENT OF INDIA and the same is expressly provided under Section 37 of the LIC of India Act, 1956. |
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