This is post is an attempt to give a brief about Gratuity Liability, Gratuity Act 1972 amendments and benefits of creating Group Gratuity Trust Fund with Insurers by Companies having more than 10 employees and having 5 years or more years of Business Operations.
What is Gratuity?
When employee leave the service, employer rewards him for his accrued service in the organization. He does so by giving you a free lump sum of cash - called gratuity in financial parlance - on your exit. The amount that employer gives is based on the number of years of service employee have put into the organization.
As per Gazette notification issued by Ministry of Law & Justice in The Gazette of India on dated 29th March 2018 as applicable WEF same date amends the Ceiling Limit from "ten lakh rupees" to "such amount may be notified by the Central Government from time to time" is substituted. A pdf copy of same is available at following weblink :- http://egazette.nic.in/WriteReadData/2018/184298.pdf
When is Employee entitled to Gratuity?
Gratuity in earlier days was rather arbitrary and completely hostage to the whims of the employer. A wealthy, well-established employer would reward his dedicated employees and the not so rich would refuse such generosities. This led to a lot of discord and finally, the government stepped in, passing the Payment of Gratuity Act, 1972, making it mandatory for all employers with more than 10 employees to give them the gratuity. Employees, as defined here, are the ones hired on company payrolls. Trainees are not eligible and gratuity is paid on the basis of the employee's basic plus dearness allowance if any.
How much can employee get?
An employee becomes entitled to a gratuity on resignation or on retirement after five years# or more of service. As per the Act, the gratuity amount is 15 days' wages multiplied by the number of years put in by you. Here wage means your basic plus dearness allowance. Take the monthly salary drawn by you last (basic plus dearness allowance) on resignation or retirement and divide it by 26, assuming there are four Sundays in a month. This is your daily salary. Multiply this amount by 15 days and further with the number of years you have put into service.
History of amendments in Gratuity Act ?
Gratuity benefit is usually payable at the time of retirement. Since at the time of retirement employee generally has no source of regular income and due to old age- increasing medical expenses and increasing inflation to meet with day to day expenses. So to cope up with all these uncertainties, Gratuity Payment becomes a financial support to meet necessary expense as a single one-time payment. The rules and regulations being prescribed in Gratuity Act 1972 need to be amended time to time and labor ministry tries to provide full justice by making amendments to the above act, in the national Parliament. Some of the amendments in the Payment of Gratuity Act 1972 are as follows:-
The first amendment made by the Payment of Gratuity (Amendment) Act, 1984 inter alia provides for raising the wage limit for coverage from Rs 1000/- to Rs 1600/- per month and appointment of Inspectors.
The second amendment made by the Payment of Gratuity (Second Amendment) Act, 1984 inter alia re-defined the term ‘continuous service’ and provided for grant of exemption to a class of employees from the operation of the Act.
The third amendment made by the Payment of Gratuity (Amendment) Act, 1987 inter alia provided for:-
(a) Raising the wage limit for coverage from Rs 1,600/- to Rs 2,500/- per month, which was further raised to Rs 3,500/- p.m. .
(b) Replacing the ceiling of twenty month’s wages for payment of gratuity by a monetary ceiling of Rs 50,000/-
(c) Making it obligatory for the employers to pay simple interest at a specified rate if the gratuity is not paid within 30 days from the date it falls due.
(d) Compulsory insurance/setting of gratuity fund for payment of gratuity.
In later amendments, wage limit was removed altogether and ceiling limit was revised from time to time. Ceiling limit was raised to Rs 100,000 from Rs 50,000 in 1994 and further raised to Rs. 3,50,000 in 1997. It was increased to Rs. 10,00,000 in 2010 and As per Gazette notification issued by Ministry of Law & Justice in The Gazette of India on dated 29th March 2018 as applicable WEF same date amends the Ceiling Limit from "ten lakh rupees" to "such amount may be notified by the Central Government from time to time" is substituted.
Companies can manage the future payment of Gratuity by Creating a Group Gratuity Trust Fund.
Why Creation of Group Gratuity Trust Fund Beneficial for Employer?
Normally Group Gratuity funds of the trust can either be invested by the trustees or alternatively the funds may be let out to LIC who will then invest & give a specified return on the trust fund. The administrative work of the trust, however, is the responsibility of the trustees. Companies prefer to create LIC managed Trust Fund to focus on their core business.
In case of LIC managed funds of the trust, companies will get following benefits:-
(i) The job of investment and interest is paid by the Corporation on the accumulated funds.
(ii) In case of death while in service, the service period is counted while calculating the gratuity as if the person has served the company up to his Normal Retirement Date.
(iii) LIC maintains the fund under the name of trust.
(iv) Investment of funds is taken care by LIC & Interest is declared as per the performance of Total Fund and credited to the individual trust fund.
(v) At the time of exit of employee, trustee send discharge and advice LIC to make payment of Gratuity as per Scheme to the Trust.
(vi) Tax benefits are as per the provisions of the Income Tax Act, 1961. Such as Contribution to LIC are treated as business expenses to the company and Interest earning are Tax Free. (Tax laws are subject to change.)
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.
If you or your client have any requirement of Creating Group Gratuity Fund or you looking for an experienced consultant for the above purpose then you may contact me.
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