1. It must be set up as an irrevocable trust
2. It must be set up for providing gratuity benefits to the employees trust to act as a separate legal entity.
3. Employer can appoint trustees for monitoring and administration of the fund
Process for Gratuity Trust
The Board has to pass
a board resolution to create a Gratuity Trust and Appoint at-least 2 trustees
as per rules of Income Tax Rules, 1962. An Authorization Letter may be issued
by the Management for Formation of An Approved & Registered Gratuity Trust
to the Gratuity Trust Fund Consultant to outsource the process of setting up
the An Approved and Registered Gratuity Trust.
Once the Board Resolution is passed and 2 trustees are appointed by the Management of the company then the process continue with the following steps: –
- Gratuity Trust Deed
and Trust Rules executed and Registered with the Sub Registrar of the
Jurisdiction of the Company.
- Once the Trust is registered then Trustees apply for
PAN and TAN of the Gratuity Trust.
- After getting
the PAN and TAN of the Registered Gratuity Trust then an Bank Account
is opened in a Scheduled Bank as mentioned in Rules of the Income Tax Rules,
1962.
- Once the Bank Account
of the Registered Gratuity Trust is Formed then Company pay the Initial
Contribution into the Bank Account .
· On receipt of Initial Contribution from the Company in the Registered Gratuity Trust, Trustees decides to Invest this amount into a Group Gratuity Scheme of Insurer (LIC, SBI, KOTAK, HDFC, etc.) or they invest the money as per rules of Income Tax Rules, 1962.
· Once the Investment is done then trustees of the registered Gratuity Trust apply for Approval of Gratuity Trust in Terms of Part C of Fourth Schedule of the Income Tax Act, 1961 with following documents: –
- Board Resolution of Management/Company
- Registered Gratuity Trust Deed and Trust Rules
- PAN and TAN of Trust Deed
- Bank Account Details of Gratuity Trust
- Premium Receipt of Investment made by the Trustees into Group Gratuity Scheme of Insurer (LIC etc.) or Investment Portfolio of Investment as per rules of Income Tax Rules, 1962.
- Application to CIT for Approval and other relevant documents.
Approval for the
Gratuity Trust becomes void, if Approval is not received from the Income Tax Department (CIT) in following cases:
·
Variation is made in
Original Trust Deed.
·
Variation is made in
Original Trust Rules.
·
Appointment of New
Trustees.
· Variation in Original
Benefits of Gratuity given by the Company in Trust Rules (i.e. Change in
Ceiling Limit, Change in Vesting Condition for Gratuity Benefits etc.)
·
Changes in Insurer of
Group Gratuity Scheme.
·
Merger & De-merger
of Company
·
Winding up of Group
Gratuity Scheme.
Actuarial Report under Gratuity Plan from
Actuary is needed by the Company at the end of each Financial Year for
compliance AS 15 (Revised 2005) & Ind AS 19 and assessment of Annual
Contribution to be made by the Company into the Approved Gratuity Trust for
getting tax benefits available under Section 36 (1) (v).
- Section 40(a)(iv)
- Section 40A(9)
- Section 43B(b) :
Time limit for payment of contribution
- IT Act specifies Gratuity fund on;y, but such fund is generally established in the form of a trust. A few employees become the trustees of such fund.
- The contributions made towards the Gratuity fund generally depends on the Actuarial Valuation. However, an employer may approach a life insurer in order to purchase a group gratuity plan. The Gratuity trust can invest its funds by making a contribution under a Group Gratuity Scheme of an insurer. Thus, the employer has to pay annual contributions to the insurance company as decided by the insurance company. The gratuity will be paid by the insurance company to Trust and Trust will pay to respective employee.
- Approved Gratuity Funds : Section 2(5) of the Act defines an ‘approved gratuity fund’ as ‘a gratuity fund which has been and continues to be approved by the Chief Commissioner or Commissioner in accordance with the rules contained in Part C of the Fourth Schedule’. In order to get the approval of the chief commissioner or commissioner, an application needs to be made under Rule 109, including prescribed particulars regarding the employer, nature of business of the employer, employees eligible to participate in the fund and verified in the prescribed manner.
- If your gratuity fund registered u/s under rule 2 (1) part 'c' of part 'C' Schedule of It act than ---- Income of an approved gratuity fund is exempt under Section 10(25)(iv).
- Further it should maintain books of account and audited annually, IT return of gratuity fund may be treated as exempt as per interpretation/expert opinion or if not treated as exempt them it will be filled in ITR -7.
Creation of Gratuity Trust by company vide a trust deed
Amendments to Trust deed based on observations of Income tax Department
Gratuity Trust Rules & Regulations
Taxation of Gratuity Trust as an Assessee
Life Insurance Corporation of India offers its Group Gratuity Cash Accumulation scheme to enable employers to meet their gratuity liability in a very simple and efficient manner. The scheme is formulated in compliance with Part C of the IV schedule of Income Tax Act and tax benefits are available as provided in Income Tax rules
- Fund management under interest accumulation system
- Claim settlement on exit as per company rules/gratuity act
- Built in Insurance arrangement for the employees for future service
- MIS related to Income Tax and trusts accounts and Actuarial valuation
- Preferring a claim from LIC and paying to employee
- Paying the money to employees and seek reimbursement
- Paying claims to employees at their end and seeking annual reimbursement
- Insurance cover for future service gratuity
- Income Tax Benefit on Insurance Premium
Fund Option
|
Asset Allocation
|
Objective
|
Group Short Term
Debt Fund
|
100%: Debt securities,
Money market Instruments
& Cash (including Debt
Schemes of Mutual Fund)
|
To provide suitable returns through low risk investments in debt and money market instruments with an underlying objective to attempt to protect the capital deployed in the fund.
|
Group Debt Fund
|
100%: Debt securities,
Money market Instruments
& Cash (including Debt
Schemes of Mutual Fund)
|
To provide accumulation of income through investment in various fixed income securities. The Plan seeks to provide capital appreciation while maintaining suitable balance between return, safety and liquidity.
|
Group Balanced Fund
|
Minimum 80%: For Debt securities, Money market Instruments & Cash (including Debt Schemes of Mutual Fund)
Maximum 20%: For Equity
and equity related
securities
|
Balanced Plan is aimed at
generating a healthy mix of longterm capital appreciation along with current income. The strategy is to invest in equity as well as fixed income instruments in optimum proportions as derived from the analysis of prevalent market conditions from time to time.
|
Group Growth Fund
|
Maximum 60%: For Equity
& Equity related securities
Minimum 40%: For Debt securities, Money market Instruments & Cash (including Debt Schemes of Mutual Fund)
|
To primarily generate long-term capital appreciation through investment in equity and equity related securities and complement it with current income through investment in fixed income instruments in appropriate proportions depending on market conditions prevalent from time to time.
|
Rule 101 of the Income-tax Rules,1962
Monies contributed to approved gratuity funds are required to be deposited in a Post Office Savings Bank Account or a current account with any scheduled bank, or are required to be utilised for the purpose of making contributions under Group Gratuity Scheme entered into with the Life Insurance Corporation of India. To the extent such monies are not so deposited or utilised, they are required to be invested in the modes of investment specified in rule 67(2) of the Income-tax Rules, 1962.
APPROVED GRATUITY FUNDS - Income-tax Rules, 1962
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APPROVED GRATUITY FUNDS
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Provident Fund : EPS
Provident Fund : NPS
PFRDA, is the pension regulator for India and works towards its promotion and development. It is a Central autonomous body and is a quasi-government organisation and has executive, legislative and judicial powers similar to other financial sector regulators in India such as Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) and, Insolvency and Bankruptcy Board of India (IBBI). PFRDA administers and regulates the National Pension System (NPS) and also administers Atal Pension Yojana.
- Regulate NPS and pension schemes to which PFRDA Act applies
- Establish, develop and regulate pension funds
- Protect the interest of pension fund subscribers
- Register and regulate intermediaries
- Approve schemes, terms and conditions, and laying down norms for management of corpus of pension funds
- Establish grievance redressal mechanism for subscribers
- Promote professional organisation connected with the pension system
- Settle disputes among intermediaries and also between intermediaries and subscribers
- Train intermediaries and educate subscribers and the general public with respect to pension, retirement savings and related issues
- Regulate the regulated assets
- Call for information, conduct inquiries, investigation and audit of intermediaries and other entities connected with pension funds
National Pension Scheme
NPS is a defined contribution pension system introduced by PFRDA whereby subscribers’ contributions are collected and accumulated in an individual pension account using various intermediaries. Under NPS, individual contributions are pooled together into a pension fund and is invested as per approved investment guidelines. Funds are generally invested in diversified portfolios consisting of government bonds, bills, corporate debentures, and shares, based on subscribers choice. Subscribers also have an option, at the time of exit, to purchase a life annuity by using accumulated pension fund. As already mentioned,, NPS is governed by PFRDA. PFRDA also established an NPS trust under Indian Trust Act, 1882 in order to manage assets and funds under NPS in the best interest of subscribers. NPS Trust is managed by a Board of Trustees appointed by PFRDA who is the settlor of the trust. Legal ownership of trust and funds is entrusted to the board of trustees. The Board consists of a Chairman and up to 5 members including the chairman, and the Board meets once in 3 calendar months. NPS Trust is responsible for executing individual pension accounts in its name with the subscriber, protecting the properties of NPS, safeguarding interest of NPS and its subscribers, approving various documents and reports including audited financials submitted by various intermediaries of NPS trust, monitoring and evaluating operations of such intermediaries, exit the subscriber from NPS etc.
Intermediaries, stakeholders of PFRDA, NPS Trust
PFRDA has appointed various intermediaries for the purpose of collection, management, recordkeeping and distribution of accumulations. Various intermediaries of PFRDA are as follows:
Pension Fund
Pension fund is one of the intermediaries which has been granted a certificate of registration by PFRDA as an authority for receiving contributions, investing them, and paying the subscribers in a specified manner. Primary functions of the pension fund are as below:
- Collection of subscribers funds (subscribers who have given their choice of investment and subscribers who have chosen auto allocation of funds) from trustee bank for the purpose of investment
- Constitute investment committee and risk management committee
- Maintain proper books of accounts for pension fund schemes
- Declaration of Scheme NAV (Net Asset Value) at the end of each working day and communicating to Central Record Keeping Agency (CRA) for unitization in subscriber’s Permanent Retirement Account Number (PRAN)
- Reporting operational activities to NPS trust at regular intervals
Central Record Keeping Agency (CRA)
CRA is an agency registered under PFRDA to perform functions of record-keeping, accounting, administration, and customer service to Pension scheme subscribers. National Securities Depository Limited e-governance infrastructure Ltd (CRA1) is the first CRA appointed by PFRDA and Karvy Computershare Private Limited (CRA2) is the second CRA. In case of private sector employee pension subscribers, an option is given to the employer to choose between either CRA1 or CRA2 and in case of non-employee voluntary subscribers, option to choose the CRA is with the subscribers themselves. In case of government sector subscribers and subscribers registered with Atal Pension Yojana, the respective Government will choose the CRA and in case of NPS-Lite subscribers, it is the aggregator who has to choose the CRA.
Functions of CRA
- Acts as an operational interface for all intermediaries under the CRA system and liasons with all necessary external agencies to accomplish operations and commissioning
- Issuance of PRAN and despatch of PRAN card, digitization and maintenance of the database of PRANs, and record transaction related to subscribers
- Unitization of the contribution made by subscribers to their PRAN account
- Receive instructions from subscribers and aggregate the instructions and pass it on to other intermediaries such as Trustee Bank, Annuity Service
- Providers and Pension Fund Managers
- Facilitate credit subscribers’ account and timely allocation of funds to
- Pension fund managers
- Offer various services directly to subscribers, including consolidated account statements
- Provide call centre facilities to subscribers
- Provide centralised grievance management system
- Process exit or withdrawal request of subscribers etc
Point of Presence (PoP)
PoP is another intermediary registered under PFRDA as a point of presence and has electronic connectivity with the CRA for the purposes of receiving and transmitting funds and instructions and pay out of funds.. Functions of PoP
- Facilitate registration of subscribers, verify KYC documents
- Initial contribution processing at the time of registration
- Receive and upload grievance received from subscribers and other intermediaries in the Central Grievance Management System (CGMS) of CRA, which in turn routes the grievance to respective intermediaries
- Perform due diligence in accepting subsequent contributions and remit the funds to the trustee bank
Trustee Bank
It is a bank and an intermediary responsible for the day-to-day flow of funds, and also provides banking facilities, receives NPS funds from all nodal offices, and transfers the same to intermediaries such as pension fund/annuity service provider/other intermediaries as per operational guidelines. Axis Bank has been appointed as Trustee Bank from 1 July 2015 and the appointment is valid for 5 years subject to annual review by PFRDA.. Functions of Trustee Bank
- Collect NPS funds from nodal offices received through online and physical mode
- Reconcile the amount collected from nodal offices and amount paid by subscribers
- Consolidate all contribution records and prepare Fund Receipt confirmation file
- Assist CRA in settlement process by transferring funds to CRA etc
Custodian
Custodian is responsible for the safe-keeping of securities or assets held under NPS or any other pension scheme and providing incidental services including maintaining accounts of securities or assets, undertaking activities as a Domestic Depository, collecting the benefits or rights accruing on the securities or assets, etc. Stock Holding Corporation of India Limited is the custodian appointed by PFRDA.
Aggregator
Agrregator is another intermediary registered under PFRDA to perform subscriber interface functions under NPS-Lite/Swavalamban, such as carry out changes to subscribers database as requested by subscribers, processing of subscribers contribution to NPS-Lite/Swavalamban and grievance redressal, etc.
Annuity Service Provider (ASP)
ASPs are entrusted with the task of providing annuity payments to subscribers at the time of exit/periodic annuity payment depending on the annuity contract opted by subscribers, addressing queries of potential subscribers with respect to purchase of annuities, facilitate subscriber registration for purchase of annuity, grievance redressal of subscribers who purchased annuity from it, etc.
Retirement Advisor
Retirement adviser can be any person i.e., individual, firm, company, trust, society, etc. registered under the PFRDA to provide advice on NPS or other pension schemes regulated by the authority to subscribers or other persons or group of persons.
Online Services offered by PFRDA
PFRDA is not behind in making use of digitization and making pension system operation smooth for its subscribers. PFRDA enables its subscribers to perform the following activities online:
- Opening of NPS account
- Contribution to PRAN account except NPS-Swavalamban and Atal Pension Yojana accounts
- Activate Tier-II Account i.e., voluntary savings facility which does not have restrictions on withdrawals and also no tax benefit
- Modification of personal details on the database
- Modification of investment pattern
- Change of pension fund except for government subscribers and subscribers of certain corporates
- Download statement of transaction at any time, physical copy of which is generally despatched to subscribers once in a year and soft copy periodically to registered email id
- Exit/withdrawal requests
- Lodging of complaint
- Print e-PRAN