Gratuity Trusts – An Overview

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What is Gratuity

Derived form the word “Gratitude”

Lumpsum amount paid by employer to employee at the time of retirement, superannuation or death

Statutes Applicable

  • Payment of Gratuity Act, 1972
  • Income Tax Act, 1961
  • AS 15/ Ind AS 19 – Employee Benefits

Provision of Gratuity liability

       Payment of Gratuity Act, 1972

  • Section 4A(1) – Purchase a Gratuity insurance from LIC
  • Section 4A(2) – Establish an Approved Gratuity Fund

Functioning of the Gratuity Trusts(Approved Gratuity Fund)

  • A trust [assessable as an AOP u/s 164(1)(iv)], with atleast 2 trustees is to be formed
  • Approval of CCIT/PCCIT is to be taken
  • The trust should have separate books [Rule 109] & separate bank account with a scheduled Bank [Rule 101]
  •  Contribution to Approved Gratuity Fund – Allowable as deduction u/s 36(1)(v) of Income Tax Act, 1961
  • Contribution received by the Fund/Trust – Is a Capital receipt, so not taxable
  • Income accrued/derived from the Investments made out of Contributions – exempt from tax u/s 10(25)(iv).
  • Contribution to be invested in the manner specified under Rule 67(2) of Income Tax Rules
  • CBDT Circular No. 18/2017 dated 29th May 2017 exempted these trusts from ITR Filing u/s 139.
  • The above circular also states that TDS need not be deducted on payments made to these trusts.

Read This: PF TRUSTS – AN OVERVIEW

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CA Prabhath Sharma Ganti

Working as Audit Senior Assistant @Deloitte USI. Enthusiastic and Innovative writer. Writes about Taxation and Stock market aspects.

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