Case Law Details
Provisions for gratuity actually accrued during the year is allowable
Section 40A(7)(a) speaks that any of provisions made for the payment of the gratuity to the employees on the retirement shall not be liable which means that the provision made for preretirement of the employees in future shall not be liable and the same also therefore do not debar the allowability of accrued liability for the employees who actually retired during the year. In fact such liability accrued during the year is taken care of in section 40A(7)(b) and the operation of section 40A (7) (a) is subject to section 40A(7)(b) which is as under:-
(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.
It is clear from the above provisions contained in section 40A(7)(b) that provision made by the assessee for the purpose of payment of any gratuity, that has become payable during the year is allowable which means that the liability which has actually accrued during the year is allowable. In fact the CBDT has also clarified the introduction of section 40A(7) that the provision made for payment of gratuity that has become payable during previous year is allowable. Therefore the liability accrued on account of the gratuity which became payable during the year on account of the employees who retired during the year itself is allowable.
Payments towards Employees’ contribution to PF are Deductible If the Payments are made after the due date but within grace period
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I hope the below write-up may help you in understanding requirement for “Formation of an approved Gratuity Trust”
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 :-
(Wages 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 is a statutory right of employee whoever completes 5 years in the same organization and the cost of Gratuity is to be borne by the Organization and not by an employee. Gratuity is a defined benefit nature and it Increases with the increase/changes in following:-
(a) Past Service of Employee,
(b) Increase in wages of Employee,
(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in 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.
(f) Change in applicability of compulsory insurance for Gratuity by State Governments due amendment in the act. (State of Andhra Pradesh notified about the compulsory insurance for Gratuity under Andhra Pradesh Compulsory Gratuity Insurance Rules, 2011vide Lr.No.M1/8842/2010, dated: 04.12.2010 from the Commissioner of Labour, Andhra Pradesh and remains un-notified for rest of India).
Applicability of compulsory insurance for Gratuity can be notified by the other State Governments because compulsory insurance of gratuity secures the gratuity benefits of employee even in case of bankruptcy of the company.
For the purpose of Accounting of gratuity benefits, Companies makes provision of Gratuity on accrual basis in their balance sheet to comply with the requirement of Accounting Standards issued by the Institute of Chartered Accountants of India. Compliance of these standards (i.e. AS 15 Revised 2005 and IndAS 19) is mandatory in nature. Generally services of an Actuary is taken for preparation of actuarial report under Gratuity Plan for compliance of AS 15 Revised 2005 and Ind AS 19 by the company’s annual basis at the end of each financial year.
Gratuity provision made in the balance sheet only suffice the requirement for compliance of Accounting Standard 15 (Revised 2005) but it is not allowed as deduction (Refer Section 47A (7) of Income Tax Act 1961)
For achieving the tax benefits under Section 36(1)(v) for contribution of gratuity equivalent to gratuity provision in the balance sheet based on actuarial report (Refer Circular : No. 30(XLVII-18), dated 30-11-1964 for clarification for Rule 103 for Initial Contribution of Income Tax Rules 1962), companies requires to create an approved Gratuity Trust.
Section 36(1)(v) of Income Tax Act, 1961 reads as under :-
“any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust”
An approved gratuity trust investment is either “Self Managed by the Trustee” or “Managed by the Insurance Company”.
The establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise. I 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.
I offer paid online/offline consultation for the following services:-
1. Consultation for Complete Guidance for formation An Approved Irrevocable Gratuity Trust,
2. Consultation for Documentation required for approval of Gratuity Trust from Authority,
3. Consultation for Group Gratuity Schemes of LIC, SBI and Bharati Axa,
4. Consultation for preparation of Inputs for Employee Benefit Valuations,
5. Consultation for Retirement Investment in Immediate/deferred Annuity Schemes,
6. Consultation for Employee Retention Schemes,
7. Consultation for Employer-Employee and Key-Man Insurance Scheme,
8. Consultation for Group Insurances
(Please note that my 50% telephonic/online consultation charges needs to be paid by you in advance)
Tikaram Chaudhary
Head Consultant
(Experienced Consultant with 10 years of exposure in assessment/valuations of Employees Benefit Liabilities specially Gratuity/Leave Encashment Liabilities & Long Service Award Schemes)
Gratuity Fund Trust Consultant
Office Adderess : R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi – 110059
Mobile Number: 9211637063
Email ID – tikaramchaudhary@gmail.com,
(All Consultancy Services provided by us are subject to terms & conditions will be stated when a consultation job is accepted.)