How Indian & Multinational Companies can comply with requirements of Payment of Gratuity Act 1972 and Companies Act 2013 ?
This article is an attempt to create awareness amongst CA, CS, CMA, Auditors, HR & Directors of the Indian and Multinational Companies about the applicability of the Legal and Accounting Compliances on Indian Establishments for Gratuity Benefits.
Introduction
Gratuity is a statutory right of employee whoever completes 5 years in the same Establishment and is a terminal benefit, it means gratuity amount will be determined when the monthly terminal wages of the employee are known to Establishment. The cost is to be borne by the Employer and not by the Employee hence it can neither be shown as deduction from employees salary nor as a Part of CTC of employee. 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,
(c) on his death or disablement due to accident or disease
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
For the purpose of effectively implementing the Payment of Gratuity Act, 1972, the following compliances are imposed on Establishments by the Competent Authority (i.e., Deputy Labor Commissioner) Regulating the Provisions of the Payment of Gratuity Act, 1972 and Ministry of Corporate Affairs:-
1. Legal Compliances as per provisions of the Payment of Gratuity Act, 1972.
2. Accounting Compliance as per provisions of the Companies Act, 2013.
A. Legal Compliances :- All Indian and Multinational Establishments with employees strength 10 or more are compulsory requires to comply with the following provisions of the Payment of Gratuity Act, 1972 & The Payment of Gratuity Rules.
A. As per provision of Rule 3 of the Payment of Gratuity Rules – Notice of Opening, Change or Closure of the Establishment following Forms to be submitted by the establishment to Competent Authority (i.e. DLC Office)
I. Form A – Notice of Opening
II. Form B – Notice for Change in Name, Address, Employer or Nature of Business.
III. Form C – Notice for Closure of Establishment.
IV. Form F -Nominations – As per provisions of Rule 6 the Payment of Gratuity Rules, All Indian Establishments with employee strength 10 or more are required to maintain the records of Form – F, so that they will have all information available to make the payment of gratuity to employee or his Nominee/Nominees within 30 Days on exit or death of employee (Refer Section 7 of the Payment of Gratuity Act, 1972)
V. Maintenance of Records other Forms as prescribed in Rules of the Payment of Gratuity Rules
VI. Compulsory Gratuity Insurance – As per provisions of Section 4A, No employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2) of THE PAYMENT OF GRATUITY ACT, 1972.
VII. Establishment of the CIT Approved Gratuity Trust in terms of Part C of Fourth Schedule of Income Tax Act, 1961 is a mandatory requirement to get the tax benefits under Section 36 (i) V of the Income Tax Act, 1961 for Initial and Annual Contribution made by establishment to Compulsory Gratuity Insurance of following Insurers :
i. LIC
ii. SBI Life
iii. HDFC Life
iv. Kotak Life
v. Future Generali
(Kindly note that companies already registered under the provisions of the Payment of Gratuity Act, 1972 will get exempted from registration under the new provisions of the Social Security Code 2020)
2. Accounting Compliance – As per provisions of Section 129 of the Companies Act 2013, Indian and Multinational Companies Operating India needs 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. Accounting and Disclosure requirements for Employee Benefits Plans (i.e. Gratuity Plan) is laid down in the following 2 Accounting Standards as issued by The Institute of Chartered Accountants of India (ICAI): –
A. Indian Accounting Standard for Accounting of Employees Benefits
INDIAN GAAP- AS-15 (Revised 2005)
IndAS-19
Generally, Actuarial Valuations for compliance above Accounting Standards are required for Gratuity and following Employee Benefit Plans under: –
a. Actuarial Valuation for Gratuity Plans,
b. Actuarial Valuation for End of Service Benefit Plan,
c. Actuarial Valuation for Earned Leave Plan,
d. Actuarial Valuation for Sick Leave Plan,
e. Actuarial Valuation for Defined Benefit Pension Plans,
f. Actuarial Valuation for Post-Retirement Medical Benefit Plan,
g. Actuarial Valuation for Settlement Allowances on Retirement,
h. Actuarial Valuation for Long Service Award Plans/Incentive Plans,
i. Actuarial Valuation for Interest Rate Guarantee for Exempted Provident Funds,
j. Actuarial Valuation for other Defined Benefit,
Most frequently following terms are used in Actuarial Reports in compliance of the above standards are: –
i. Present Value of obligation.
ii. Interest Cost.
iii. Current Service Cost.
iv. Service Cost
v. Past Service Cost.
vi. Curtailment Cost
vii. Settlement Cost
viii. Benefit Paid.
ix. Actuarial Gain/loss
x. Experience adjustment
xi. Other Comprehensive Income.
xii. Defined Benefit Obligation.
xiii. Estimated Term of Benefit Obligation.
xiv. Statement of Profit/loss.
xv. Interest Rate for Discounting.
xvi. Salary Escalation Rate.
xvii. Withdrawal Rate
xviii. Mortality Rate, etc. etc.
The Actuarial Valuations are required by the Indian Companies in following events :-
I. For making the Initial & Annual Contribution into Gratuity Trust Account.
II. Annually, Half Yearly and Quarterly for making provision of Gratuity Liability in BS as Accounting Standards (i.e. AS 15 Revised 2005) and IndAS 19) per Section 133 of the Companies Act, 2013
III. On The Date of Transfer of Employees from One Company to Another
IV. On the Date of Acquisition
V. On the Date of De-merger
VI. For Submission of Actuarial Reports of last 5 year in SEBI for Listing on Share Market
VII. For assessment of Actuarial Liability for Taking Grant from any Ministry
In case of any clarification in above matter you can contact me.
Author Bio
Sir, can you tell me, whether Gratuity applicable to partnership firm, if firm has has deducted PF from employee salary.