| Insurance >> Professionals >> Group Graduity |
| 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 lakhs. 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. |
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| We give below the details as 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 : |
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| (1) LIC offers a very attractive rate of interest depending upon the size of the fund. |
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| Interest Rates for 2003 - 2004 |
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| Fund Size |
Rate of Interest |
| Below Rs. 25 lakhs |
7.55% |
| Rs. 25 lakhs or more but less than Rs.50 lakhs |
7.65% |
| Rs. 50 lakhs or more but less than Rs.75 lakhs |
7.75% |
| Rs. 75 lakhs or more but less than Rs.1 crore |
7.85% |
| Rs. 1 crore or more but less than Rs. 2 crores |
8.00% |
| Rs. 2 crores or more but less than Rs. 5 crores |
8.15% |
| Rs. 5 crores or more but less than Rs.10 crores |
8.30% |
| Rs. 10 crores or more but less than Rs.20 crores |
8.40% |
| Rs. 20 crores or more but less than Rs.50 crores |
8.50% |
| Rs. 50 crores or more but less than 75 crores |
8.60% |
| Rs. 75 crores or more but less than 100 crores |
8.75% |
| Rs. 100 crores or more but less than 200 crores |
8.90% |
| Rs. 200 crores and above |
9.00% |
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| (2) 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 fund start earning interest from that very date. |
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| (3) Trustees will have to open Bank Account in the name of Trust and future contributions to the fund are to be routed through the Trust A/c by the company. |
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| (4) 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. |
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| (5) The Trustees would have not 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. |
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| (6) By handing over the funds to LIC, the administration work would be considerably reduced. |
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| (7) The trustees will perform the statutory roles as envisaged in the act. However, in view of the above points considerable work would be attend to by LIC on behalf of the trustees. |
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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 pre-mature unfortunate death, a sum equal to the gratuity payable in respect of the entire service (actual and future). Future service gratuity i.e. life cover is restricted to limits as specified herein below and subject to overall gratuity limits as per rules of the company. |
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| No. of Employees |
Limit |
| 10 - 49 |
1.75 lakhs |
| 50 - 99 |
3.50 lakhs |
| above 100 |
4.50 lakhs |
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| This is in sharp contrast to the benefits payable only for the actual service under other methods of funding/ paying gratuity. |
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| The benefit is secured at a low cost through One Year Renewable Term Assurance Plan. |
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| Example |
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| (at half a month's salary per year of completed service - 15/26 of month's salary) |
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| An employee joined the service at age |
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25 Years |
| Retirement age |
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60 Years |
| Death at age |
: |
35 Years |
| Anticipated service |
: |
25 Years |
| Salary at the time of death |
: |
Rs.10000/-per month |
| Gratuity on the accured basis |
: |
Rs. 57692/- approx |
| Gratuity on anticipated basis |
: |
Rs.2,01,923/- (accrued Gratuity plus life cover of Rs. 1,44,231/- approx) |
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| Life cover is based on salary as at annual renewal date |
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| The 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 initial contribution may be paid in lump sum or spread over a maximum period of five years. The corporation determines contribution payable as annual premium , under the policy, on the basis of an actuarial variation of the gratuity liability subject to the statutory limit of 8 1/3% 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 benefits is utilized and balance is credited to the running account of the scheme which accumulates at an interest rate declared by LIC form time to time. |
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| 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. |
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| How is the Scheme Installed? |
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| The steps to be taken by the employee for installing the Scheme are : |
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| (i) To draft the Trust Deed and Rules in consultation with LIC, to execute the Trust Deed, and to appoint Trustees for administering the scheme. |
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| (ii) To send application to the Commissioner of Income-Tax for approval under Part C of the Fourth Schedule of the Income-Tax Act 1961 and |
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| (iii) To forward to LIC, the Master proposal signed by the Trustees, the employee data in the prescribed form , copies of Trust Deed and Rules and Cheque in payment of premium. |
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| LIC will offer necessary guidance to the employer in drawing up the Trust Deed and Rules of the Gratuity Scheme and in securing approval of the income-tax commissioner. |
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| Data Required to be Furnished by the Employer |
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- Name of the employee
- Date of Birth
- Salary (Basic + D.A.)
- Normal retirement age for the employees
- Date of commencement of Scheme
- Gratuity benefits applicable to the employees
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| Legal & Taxation Aspects |
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The provisions relating to approved Gratuity Funds are se tout in Part 'C' of the Fourth Schedule of the Income-Tax Act, 1961 and part XIV of the Income-tax rules , 1962. |
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| The list of important aspects and the relevant rules / sections dealing with these aspects and clauses in the Model Trust Deed / Rules of LIC dealing with these aspects are detailed below : |
- Employer's ordinary annual contribution shall not exceed 8 1/3% of salary as per Rule 103
- 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)
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- 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
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| (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 provision 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 |
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| Multi - Employer group are not allowed as per CBDT letter addressed to LIC. |
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| 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. |
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