Gratuity Trusts – An Overview

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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