Approved Gratuity Trust

As mentioned in our article about Overview of Gratuity there are two ways of booking the expense under Gratuity scheme which is Traditional method and Approved Gratuity Trust. In this article, we will discuss briefly about Approved Gratuity Trust. Overview

• Gratuity Trust is set up for providing gratuity benefits to the employee’s trust. This acts as a separate legal entity.
• Gratuity Trust is set up as an irrevocable trust. Irrevocable means it cannot be changed, reversed or recovered.
• Gratuity is accrued in the books based on AS-15 based on an actuarial valuation.

Traditional method v/s Group Gratuity Scheme

Traditional method	Group Gratuity Scheme
Here, there is no separate fund or trust has been made	Here, there is a separate fund, trust or like arrangement has been made
Here, assets are not backed to set aside liabilities	Here, assets are backed to set aside liabilities
Here, the amount of gratuity is given to employees at the time of their retirement or resignation	Here, certain amount of funding is yearly made to the trust.
This is a disallowable expense as per the Income Tax Act	Contribution made to Group Gratuity Trust is a allowable expense under Income Tax Act

Advantages of Group Gratuity Scheme

• Tax benefits at 25.17% of the amount contributed in the Group Gratuity Trust. Contributions to an approved Gratuity fund is deductible under section 36 (1)(v) of the Income Tax Act,1961. The carefully planned funding strategy of Easy Accounting can significantly reduce the tax bill of a company.
• When the company have approved gratuity trust, they need to give cash from within the business and commit it to a trust. So, the most important consideration is the alternative ways where the cash could be invested and return which could be received and even for how long it be received. So, now the point to be remembered is that the interest earned within a gratuity fund is tax free. Therefore, an expected return of 10% p.a. is equivalent to apporox 13-14% p.a. pre-tax return.
• In case of unfunded, the company need to pay gratuity as and when the employee leaves. So there is huge amount of uncertainty on the amount of gratuity paid every year. In case of funded, there is no sudden cash flow at the time of retirement or resignation. So there is certainty on the amount contributed to the trust every year.
• By having the liabilities funded, companies can replace the rapidly increasing gratuity payouts with a relatively stable stream of contributions into the fund.
• Easy Accounting will invest their chosen funds. Income earned through that investment is exempt from income tax.
• It creates a trustworthy relationship with the employees.

Tax benefits on Formation of Trust

• The contribution made by the employer is an allowable expense under Income Tax Act
• Income received from the gratuity trust shall be exempt under Section 10(25)(iv) of the Income Tax Act,1961.
• Interest received from Investment of an Approved Trust is also exempted as Income under Section 10(25)(iv) of the Income Tax Act,1961.

Steps for formation of Trust

1. Firstly, the company determines an initial contribution which would be made by them into the Gratuity Trust
2. Then the management need to appoint at least two trustees as per the Income Tax Rules, 1962.
3. Easy Accounting then prepare the Trust Deed and collects all the required documents from the Company.
4. After the finalisation of Trust deed and rules and getting all the documents required, an Bank Account is opened in a Scheduled Bank as mentioned in Rules of Income Tax Rules,1962.
5. Then the trustees have to make decision for investment of Gratuity Fund which would be done by themselves or they will approach an insurance company.
6. After this, we need to get approval from Income Tax Department so that the Gratuity Trust becomes an Approved Gratuity Trust.

Contributions to Trust

• Companies expected to contribute every year certain amount of fund in Gratuity Trust.
• There is no minimum amount to be contributed by the employer into the Gratuity Trust.
• Employer could get tax benefit from the amount contributed by them into the Trust.
• In case the amount in the Gratuity Trust exceeds the amount paid as Gratuity in a financial year, the extra amount shall remain in the fund.
• In case the amount paid as Gratuity shall exceed the amount in the Gratuity Trust, the remaining amount shall be paid by the employer.

Investment by Trust

• Once the Trust is made then the contribution received from Company is invested in chosen funds of insurance companies.
• Easy Accounting will advise between different debt and equity products offered by insurance companies.
• Based on the client requirements, Easy Accounting will help to choose the right product.
• Easy Accounting will connect them with insurance companies and support clients in understanding the scheme related details.

Process at Retirement/ Resignation

• The employee must send their application to the employer including all the details about him/her and also specify the gratuity amount owned by him/her.
• After receiving application, company also calculates the gratuity amount and sends notice to employee with the specified amount.
• After receiving acknowledgement, the employer has to pay gratuity within 30 days.

Documents Required for formation of Trust

• Copy of PAN Card
• Copies of Audited Financials and ITR of Employer for the latest available three years
• List of all the offices and branches of the Employer
• List containing the details of Employees of the Employer
• Name and address of the trustees

Yearly Compliance and Change in Trust Deed

• Yearly various formalities are to be done which could be done by Easy Accounting.
• For the detailed reference of the yearly compliance which is to be done, refer to this article:- https://www.easyaccounting.co.in/annual-compliance-for-group-gratuity-trust/
• For the detailed reference of the changes in trust deed, refer this article:- https://www.easyaccounting.co.in/amendments-trust-deed/

So clearly, Approved Gratuity Trust is very beneficial. And with help of Easy Accounting, its even very simple. For any further information, kindly get in touch with the below mentioned details:-
Contact :-  9920295099/8779413746
Email :- info@easyaccounting.co.in
Easy Accounting and Outsourcing Pvt Ltd.
307/310, 3^rd Floor, D Wing , Shiv Ashish Building , Plot No. 66, S.V. Road , Andheri (W), Mumbai- 400058