Gratuity benefits are governed by "The Payment of Gratuity Act 1972" and it is applicable to all companies, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months. It is paid by the Company to an employee in addition to his salary on exit from the company. Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a Defined Benefit Plan. It is applicable to all company with employee strength more than 10 in past 12 months. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of 5 years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
2. Calculation of Gratuity Benefits
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. It means, Gratuity amount will be determined when monthly terminal wages of the employee are known to the company. The terminal wages will include Basic & Dearness allowance only. The Gratuity Benefits are calculated using the following formula:-
(15/26) multiplied by (No of Completed Years on Exit) multiplied by (Terminal Wages)
The above amount is subject to a maximum ceiling limit of 20 Lakhs. Employer has option to raise this limit to give additional benefits to employees.
3. Factors affecting Quantum of Gratuity Benefits
Gratuity Benefits changes with the change in the following:-
(a) Past Service of Employee in the Company,
(b) Increase in wages of Employee in the Company,
(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in the Act,
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act,
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act,
5. Accounting & Funding Options for Gratuity Benefits
Indian Companies generally have 2 options for Management of the Gratuity Liability: -
1. Accounting Option It is also called Pay as you go option. It is mandatory in nature for all Indian Companies.
2. Funding Option In this option company create an Approved Irrevocable Gratuity Trust.
6. Why Accounting Option is mandatory in nature ?
Accounting Option - As per provisions of Section 129 of the Companies Act 2013, each company has to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year in compliance of Accounting Standards as stipulated in Section 133 of the Companies Act 2013, so that they can give a true and fair view of state of affairs of the company. MCA vide its notification dated 13th November 2018 notified National Financial Reporting Authority (NFRA) Rules 2018. The main functions NFRA Authority are:-
A. Monitoring and enforcing the compliance with accounting standards and auditing standards,
B. Overseeing the quality of Audit service and suggesting measures for improvement,
C. Power to investigate,
D. Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.
In view of above provisions, it becomes mandatory for Finance Professionals (i.e. CA, CS, CMA, Finance Professionals & Directors) involved in finalization of Financial Statements to check the proper compliance and provisions of these Accounting Standards. Accounting and Disclosure requirements for Gratuity Plan is laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI):-
I. Accounting Standard 15 (Revised 2005) AS 15 (Revised 2005) &
II. Indian Accounting Standard 19 IndAS 19
The main objectives of the above Standards are to prescribe the guidelines and disclosures for Accounting for Defined Benefit Plans (i.e. Gratuity Plan). In order to comply with above standards a company is required to recognize:-
(a) a liability when an employee has provided service to company in exchange for defined benefits to be paid in the future; and
(b) an expense when the company consumes the economic benefit arising from service provided by an employee in exchange for defined benefits.
Gratuity Benefits falls in the category of Defined Benefits. Accounting for Defined benefits is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligations are measured on a discounted basis because they may be settled many years after the employees render the related service. While the Standard requires that it is the responsibility of the reporting enterprise to measure the obligations under the defined benefit plans, it is recognized that for doing so the enterprise would normally use the services of a qualified actuary. (Refer para 49 of AS 15 (Revised 2005). The following criterion is followed by the CA, CS, CMA & Auditors to know the applicability of Accounting Standards and disclosure requirement by the Companies:-
(i) SME Companies - SME requires to give disclosures as per Clause L of Para 120 of AS 15 (Revised 2005)
(ii) Non SME Companies Non SME requires to give disclosures as per Para 120 of AS 15 (Revised 2005)
(iii) Listed Companies & their subsidiaries with Net-worth more 250 cr. In this case, companies and their subsidiaries has to give disclosure of in compliance of IndAS 19.
(iv) NBFC (Non-Banking Financial Company) with Net-worth more 250 cr. In this case, NBFC has to give disclosure of in compliance of IndAS 19 with comparative numbers of previous 2 years.
7. Why Funding Arrangement though an Approved Trust becomes mandatory for companies ?
Funding Option In this option, Companies make provision of Gratuity liability in the balance on annually on accrual basis based on actuarial report but it is not allowed as deduction whilst computing net Income of Income Tax (Refer Section 47A (7) of Income Tax Act 1961), whereas contribution made by the company equivalent to provision made by him in his balance sheet based on an actuarial reports is allowed as expense (Refer Section 36 (1) (v) of Income Tax Act 1961) and income earned by an Irrevocable Gratuity Trust on account of such investment is exempted from Income Tax (Refer Section 10 (25) (iv) of Income Tax Act 1961) So it becomes mandatory for companies create an Irrevocable Gratuity Trust.
In Indian Context, Most Companies prefer to create funding arrangement for Gratuity benefits through An Approved Gratuity Trust and managing Gratuity Fund Investment the following methods :-
A. Investment of Trust Money by Trustees.
B. Investment of Trust money into Group Gratuity Scheme of Insurer by Trustees.
(Please note that in both cases approval of Gratuity Trust in terms of Part C of the Forth Schedule to the Income Tax Act, 1961 is mandatory for organizations to get benefits under Section 36 (1) (v) & Section 10 (25) (iv))
Services offered by us:-
The establishment of An Irrevocable Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise. We have a team-leading Professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies having decades of experience in providing their services to our clients spread in all sectors of the Indian Economy, in the Public & Private Sectors which covers areas of Manufacturing, Software, Technology, Electricity, Electronics, Call Centers, Banks, Educational Institutes, Schools, Universities, Hotels, Hospitals, Hospitality Companies, etc. etc. We have almost 11 years of experience providing Consultancy Services & Support Services for:-
1. Formation of a New Approved Irrevocable Gratuity Trust,
2. Gratuity Trust Deed, Trust Rules, and Applications required for Approval of Trust,
3. Approvals of Trust in terms of Part C of Schedule IV from Income Tax Department in following cases:-
a. Approvals for New Gratuity Trust or Group Gratuity Scheme
b. Approvals for Change in Trust Deed
c. Approvals for Change in Trust Rules
d. Approvals for Change in Object of Trust
e. Approvals for Change in Trustees
f. Approvals for winding up of Trust due to winding up of the Company
g. Approvals for amalgamation with another fund due to merger/acquisition of the Companies
4. Investment of Trust Money into Group Gratuity Schemes of Insurers.
a. Traditional Group Gratuity Schemes of Insurance Companies
b. Unit Linked Gratuity Schemes of Insurance Companies
5. Investment of Trust Money as per Income Tax Rules 1962
6. Litigation Issues related to Payment of Gratuity
7. Support Services to Indian Companies for Annual Regulatory Compliance for Gratuity and Leave Encashment Trusts:-
a. Actuarial Valuations under Gratuity & Leave Encashment plan in compliance of :
AS 15 (Rev. 2005),
IAS 19 (Revised 2005)-IFRS &
b. ESOP Valuations
c. Fair Value Valuations in compliance of IndAS-113, IndAS-36, IndAS-103, IndAS-109 IndAS-28,
IndAS-38, IndAS-102 & IndAS-16.
The Services offered by us may be needed by you or by your client:-
1. For getting the Tax Benefits under Section 36 (1) (v) & Section 10 (25) (iv) of the Income Tax Act, 1961 by creating an Approved Gratuity Trust or by starting an Group Gratuity Scheme of Insurer before closure of Financial Year ending 31.03.2020.
2. For compliance of Accounting Standards whilst preparing the Balance Sheet and Profit/Loss Statement as stipulated in Section 133 of the Companies Act 2013, so that they can give a true and fair view of state of affairs of the Company. (For more details in the above matters, you may visit my articles published on www.taxguru.com at following web-link :- https://taxguru.in/chartered-account...-indas-19.html)
Since annual financial statements such as Balance Sheet and Profit/ Loss Statement of your clients are at hand for the close of the financial year as on 31.03.2020, the services we deal in will be needed by many of your clients and we will be happy to provide our services if needed. In case of any clarification, you may contact me at 9211637063 or email me your queries at .
Tika Ram Chaudhary
Gratuity & Leave Encashment Trust Fund Consultant
(Corporate Consultant with more than 11 Years of experience in providing Support Services for Actuarial Valuations in compliance of AS 15 R, IndAS 19 & IAS 19 R under Gratuity and Leave Encashment and Formation of Gratuity and Leave Encashment Trusts)
Registered Office Address: R 11, First Floor, R Block, Vikas Nagar, Uttam Nagar, New Delhi -110059
(All Services offered by us are subject to terms and conditions)
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