This Post is prepared to create awareness amongst the CA, CS, CMA, CFO, Auditors and Directors of the company about the Impact of Social Security Code on Financial Statements (i.e. Balance Sheet & Profit/Loss Statement) of Indian Companies and Options available to companies for mitigating the such Financial Impact.
The New Provisions for Gratuity Benefits as per Social Security Code 2020 will be effective in near future. Analysis of New Provisions for Gratuity Benefits reveals that there will be an exponential rise in Gratuity Liability of Companies in due to following 4 Provisions: -
i. Change in Definition of Wages (i.e. Wages to be 50% of CTC)
ii. NIL vesting period for Gratuity Payment for Fixed Term Employees.
iii. Vesting period to be 3 years in case of Special Correspondent.
iv. Compulsory Gratuity Insurance for Employees
A detail working for the Analysis of Impact of above 3 factors is available at my recently published article on www.taxguru.in at following weblink - https://taxguru.in/income-
Companies have 2 options for Management for payment of Gratuity to Employees:
I. Accounting Option – It is compulsory for all Indian Companies, which falls under the preview of Payment of Gratuity Act 1972 (a) till 31.03.2021 & under the preview of Social Security Code, 2020 on or after 01.04.2021. This option is also called Pay as you Go option. All Indian Public Sector, Private Sector and Multinational Companies need to prepare the Financial Statement such as Balance Sheet & Profit/Loss Accounts at the closure of each financial year as per provisions of Section 129 of the Companies Act 2013. As per provisions of Section 133 of the Companies Act 2013, Financial Statements should be prepared in compliance with Accounting Standards as stipulated by the Ministry of Corporate Affairs so that they can give a true and fair view of the state of affairs of the company. Gratuity provision based on the Actuarial Valuation Report received from Actuary is required by the company for compliance of Para 133 of the Companies Act 2013 for preparation of Financial Statement to comply with the requirement of Accounting Standard 15 (Revised 2005) but it is not allowed as a deduction under Section 40A(7) of Income Tax Act, 1961 (as amended time to time). The Section is produced below:-
“ (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of Gratuity to his employees on their retirement or on termination of their employment for any reason.
(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.”
II. Compulsory Gratuity Insurance Option – Indian Companies prefer this option due to Annual Tax benefits available under Section 36 (1) (v) of the Income Tax Act 1961. This Tax benefit is not available in option 1 above. Few Benefits of Compulsory Gratuity Insurance are given below: -
1. Tax Benefits
I. Initial Contribution 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) made by the Companies is treated as an
annual expense for Income Tax Computation of the Company (Refer Section 36(1)(v) of Income Tax Act 1961. 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”
II. Annual Contribution an amount equal to 8.33% of basic salaries can be paid into a gratuity fund as a tax-deductible expense.
III. Interest or investment income earned within the gratuity fund is also tax-free.
2. For Risk Management of Gratuity Benefits of Employees even in case of Financial Crisis:- Once companies forms an Approved Gratuity Trust and starts making contribution into the trust then their vulnerability to making the default for Gratuity Payment to employees as per the Section 7 of the Payment of Gratuity Act 1972 is taken over by the Irrevocable trust subject to fund available with them. Since the Approved Gratuity Trust are Irrevocable, so the money contributed by the companies will be exclusively used for payment of Gratuity Benefits to the Employees and fund money cannot be used by the company even in case of Bankruptcy.
3. Liquidity Management: - If Gratuity Benefits are unfunded, companies will need to pay off the gratuities to leaving employees as and when they leave. Therefore, the amount companies would pay Could vary greatly from year to year as the number of people leaving will be uncertain. This would be a particular concern for small or mid-size companies where the resignation of just a few senior employees, with high salary and service, could create a strain on their cashflow positions. On the other hand, if a scheme is ‘scientifically’ (or actuarially) funded, the fund will build up during the years when no major payouts are paid and then used when large payoffs are required to be paid.
4. Cashflow Stability: - For new companies, the gratuity payments to employees would be few and low. However, gratuity payouts increase nearly exponentially as employees age and work longer. By having the liabilities funded, companies can replace the rapidly increasingly gratuity payouts with a relatively stable stream of contributions into the fund.
Companies can avail above benefits after FORMING A CIT APPROVED GRATUITY FUND. As per Governing Rules 98-111 of Income Tax Rules, 1962 for Approved Gratuity Fund - A Gratuity Fund can only be established under an Irrevocable Trust. Establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise of the following: -
1. The payment of Gratuity Act, 1972 (a)
2. The Companies Act, 2013
3. The Accounting Standards – AS 15 (Revised 2005) & IndAS 19
4. The Indian Trusts Act -1882
5. The Income Tax Act, 1961
6. The Income Tax Rules, 1962
7. The Actuaries Act, 2006
8. The Actuarial Practice Standard – APS 27
9. The Social Security Code &
10. The Minimum Wages Act, 1948, etc.
We as a Team of Experienced Professionals at Gratuity Trust Fund Consultant have over 12 years of experience in helping and providing Actuarial, Legal, Investment and Accounting Solutions for Formation of New Gratuity Trust/Fund as per provisions of the Part C of Fourth Schedule of Income Tax Act 1961 to Indian Public Sector, Private Sector and Multinational Companies. The details of Actuarial, Legal, Investment and Accounting Solutions offered by us are as under: -
1. Actuarial Solutions: The process of Formation of Trust to establish Gratuity Fund starts with Actuarial Valuation of Gratuity Liability for Initial Contribution and it helps Management of a company to understand how much money initially be required to be contributed into the Gratuity Fund of a Trust. Our team give assistance/guidance to the HR, Accounts and Taxation Professional of our clients: -
a. Identification of the Employees to be included for Actuarial Valuation for Initial Contribution & Annual Audit of Gratuity Trust in Compliance of AS 15 (Revised 2005) & IndAS 19 (Refer Section 133 of Companies Act 2013),
b. Guidance for wages to be used for Actuarial Valuations,
c. Guidance for Date Format to be used in Employee Data Preparation,
d. Selection of Gratuity Plan Provision and benefit formulae to be submitted for Actuarial Valuation,
e. Guidance for Analysis of Past Trend of Financial & Demographic Assumptions such as Salary Escalation, withdrawal Rate, Mortality Rate, Disability Rate etc. to be supplied for Actuarial Valuations,
f. Reconciliation of benefit paid & Fund Position to be submitted for Actuarial Valuations disclosures in BS.
g. Support to officials of the company for clarification of Auditors queries related to Actuarial Valuations.
2. Legal Drafting Solutions:
a. Vetting of Board Resolutions, Trust Deed & Trust Rules
b. Vetting of Deed of Variations and Applications required by Trustees/Companies for Approvals from CIT for Gratuity Trust in terms of Part C of Schedule IV of Income Tax Act,1961 in following cases: -
i. Change in Name of Trust,
ii. Change in Address of Trust,
iii. Change in Trustees,
iv. Change in Investment Pattern of Gratuity Funds from Insurer to another,
v. Change in Benefit Formulae for Gratuity Benefits
vi. Change in Retirement Age of Employees
vii. Change in Object of Trust
viii. Change in Trust Rules
ix. Approvals for winding up of Trust due to winding up of the Company
x. Approvals for Transfer of Fund in Event of Merger or De-merger
c. Vetting of Application to CIT for Approval of Gratuity Fund as per guidelines of Rule Number 109 of Income Tax Rules, 1962
d. Vetting of Appeal to CIT for knowing the reasons for status of Approval of Gratuity Fund as per guidelines of Rule Number 111 of Income Tax Rules, 1962
3. Investment Solutions:
a. Advisory to Client for Selection of Gratuity Trust Money Investment as per Rule 67 (2) of Income Tax Rules, 1962 or with Insurer
b. Selection of Insurer based on Rate of Return on Gratuity Fund Investment and annual recurring expenses for Employees Compulsory Gratuity Insurance & Fund Management.
c. Managing communication with Insurer for Claims, Contributions, Annual Fund Statements, change in retirement age, change in trustees etc.
4. Accounting Solutions: We also give Annual Accounting related services for Audit of Gratuity Trust (If applicable).
Our experience in this field is spread over 12 years and we have a vast clientele in all sectors of the Indian Economy such as Industries (Software/Hardware Technology) in the Public and Private Sectors, Universities, Educational Institutes, Schools, Engineering Companies, Pharmaceuticals, FMCG (Fast Moving Consumer Goods) Companies, Warehouses, Laboratories, Hospitals, Hospitalities, Hotels, Banks, etc. etc. Our clients are from outside India also. We have highly skilled office personnel dedicated to rendering top quality service in our field. We’ll be happy to include you in the list of our esteemed clients if you opt to provide an opportunity to serve you. In case of any requirement or clarification in the matter, you may call us at 9211637063 or email your queries/requirements at tikaramchaudhary@
Tika Ram Chaudhary
Founder
Gratuity Trust Fund Consultant
An MSME - Registered with Ministry Micro Small and Medium Enterprises vide Registration Number UDYAM-DL-11-0013795
(Corporate Consultant with more than 12 Years of experience in providing Accounting, Investment, Actuarial & Legal Solutions for Formation of Gratuity Trust - Formed by companies to get Tax Benefit available under Section 36 (1) (v) of Income Tax Act 1961 & related Support Services for preparation of Inputs for compliance of AS 15 (Revised 2005), IndAS 19 & IAS 19 (Revised 2011) - IFRS required by Gratuity Trust of Indian Companies)
Registered Office Address: R 11, F/F, R Block, Vikas Nagar, Uttam Nagar, New Delhi -110059
Mobile Number: 9211637063
Landline Number : 011261651
Email Id: tikaramchaudhary@
Website : www.gratuitytrustfund.com
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