LIC’s Group Gratuity Scheme – Chennai
We offer complete service for Group Gratuity Scheme
- i) Nature of Gratuity Liability :
Gratuity is an integral part of employee benefits provided by the employers either as a statutory obligation or as a result of bilateral agreement. In terms of the Payment of Gratuity Act, 1972, gratuity is payable to an employee onthe termination of his employment after he has rendered a continuous service for not less than 5years
(a) on his superannuation or
(b) on his retirement or resignation or
(c) on his death or disablement due to accident or disease(completion of 5 years of service is not, however,necessary in case of death or disablement). The provisions of the Act are applicable to the establishments employing 10 or more employees.
The gratuity amount is to be calculated at the rate of 15 days’ last drawn wages for every completed year of service or part thereof in excess of six months, subject to a maximum of Rupees 10lakhs as per the latest amendment. In case of seasonal workers the gratuity is calculated at the rate of 7 days’ wages instead of 15 days’ wages Incase of a monthly rated staff the daily wage is taken as 1/26th of the monthly wage. However, if the employees of any establishment are entitled to gratuity benefits more favourable than the benefits provided by the Act, the favourable benefits would apply in their cases.
It will be seen that the amount of gratuity payable is related to the terminal salary/wage of the employee as also the number of years of service put in by him. Since both these factors increase year after year, the gratuity liability also goes on increasing.
(ii) Funding of Gratuity Liability :
The employer can meet his gratuity liabilities either:
- a) by making gratuity payments out of the revenue account as and when such payments become due, or
- b) by setting up a gratuity trust fund; contributing to the fund every year and making gratuity payments out of the fund as and when required.
The method of paying gratuity benefits to the employees out of current income seems to be simple but it is not safe and sound. Gratuity becomes payable on retirement, death or resignation of an employee. As a result, although gratuity liability in respect of every employee is accruing for each year of service, the employer may not make many gratuity payments in the initial years; whereas in the later years, particularly when employees retire in large numbers, the employer will have to made many gratuity payments at a time. Since gratuity payment is to be made in lumpsum, the employer will require large amounts of
liquid fund to make such payments. This will not only affect adversely the position of cash flow, but it may reduce the working capital and profits for the
year to a good extent. Sound accounting practice, as such, demands scientific funding arrangement providing for each year’s liability out of profits and gains of that year.The fund thus built up can easily take care of gratuity payments emerging from time to time without severely affecting the regular cash-flow of
any particular year. The employer also gets tax relief on the contributions made to the gratuity fund even when no gratuity payment is actually made.When an approved Gratuity Trust Fund is set up, the contributions to the Gratuity Fund (subject to certain limits) are allowed as business expenses and the build-up of the fund is entirely tax-free became income of the Trust Fund is not subject to tax.
In order that the Gratuity Fund is approved by the Income-tax Commissioner under the Income-taxAct, 1961, it is necessary to set up an irrevocable Trust Fund, i.e. the amount paid into the Fund cannot go back to the employer and thus remains untouched by his creditors. In other words, despite the changing fortunes of the employer, the gratuitybenefit of employees is secured to the extent it is funded through the Trust Fund.
An employer may have a PrivatelyAdministered Fund to which contributions are to be made on the basis of Actuarial Valuation and moneys are to be invested by the Trust as per rule101 of the Income-tax Rules, 1962
Alternatively, the employer may take LIC’s Group Gratuity Scheme. The employer will make contributions to the LIC’s scheme from year to year through the Trustees as prescribed by LIC and the investment of the fund will also be made by LIC.
The employer may make an initial contribution to the Gratuity Fund in respect of past service gratuity liability of each employee. The initial contribution may be paid at the time of admission of the employee into the fund and the amount to beallowed as a deduction on this account shall not exceed 8 1/3% of the employee’s salary for each year of past service with the employer. Such initial contribution is permitted to be made in not more than five annual instalments commencing from the year of entry to the fund.
In respect of gratuity relating to the future service,the employer can pay ordinary annual contributions throughout the future service of each employee.The ordinary annual contribution shall not exceed 81/3% of the salary of each employee during eachyear.
(iii) Funding with LIC:
- a) Advantages of LIC’s Gratuity Scheme :
- The employer gets the advantages of gratuity funding, as also tax benefit.
- LIC provides Model Trust Deed and Rules,which may be easily adopted by the companywith suitable modifications. No specialised legal help may be required.
- The contribution required from time to time will be recommended by LIC. There is no need ofvaluation of gratuity liabilities by any other Actuary.
- The fund will be with LIC and LIC will take care of the investments. As such the Trustees need not bother about investment technicalities, the prescribed pattern of investment, availability of liquid fund for gratuity payments as well as maximisation of investment return. The net return available from LIC is usually higher than that earned by the fund managed by Trustees themselves.
- All the Technical and Administrative aspects of the scheme are taken care of by LIC.
- Enhanced Death Benefit :The most attractive feature of LIC’s Gratuity Scheme is the life insurance protection in the event of death of an employee whilst in service. Whereas under the Payment of Gratuity Act the amount of gratuitypayable on death is based on the length of service completed upto the date of death, LIC’s scheme provides for payment of an amount based on the length of service which the employee would have put in upto his normal retirement age but for his untimely death. Thus,in the event of premature death of an employee,his dependants get substantially higher benefits.
To take an example, suppose an employee dies after only four years of service whereas his total service upto normal retirement age wouldbe 36 years and his monthly salary at the time ofdeath is Rs. 5,200. The gratuity payable under
the Act will be Rs.5,200 x 15/26 x 4 or Rs 12,000only, whereas under LIC’s Gratuity Scheme theamount could be as much as Rs.5,200 x 15/26 x36orRs.1,08,000/-
This benefit is made available by providing death benefit for appropriate amount under Group Term Insurance plan which is an integral part of LIC’sGratuity Scheme. This additional benefit costs the employer a small premium only, and that premium also will be allowed as an item of deductible expense in the income-tax assessment of the employer.
- Gratuity Scheme with LIC may give a sense of security to the employees regarding provision for their gratuity.
- b) Installation of LIC’s Scheme :
The steps to be taken by the employer for installation of the scheme are
- To pass a resolution for creation of the Gratuity trust Fund, appointment of Trustees,drafting the Trust Deed and Rules in consultation with the LIC officials and executing the Trust Deed on a non-judicial stamp paper (of appropriate value) purchased in the name of the Company
- To make application with appropriate Court Fee Stamp to the Commissioner of Income tax for approval of the Trust Deed & Rules under Part C of the fourth Schedule of the Income-tax Act, 1961
- To forward to LIC the Master Proposals signed by the Trustees, employee-data in theprescribed form, certified copies of Trust Deed and Rules and cheque in payment of premium and
- To open a bank account in favour of the Trustwith any nationalised bank.
- c) Administration of LIC’s Scheme:
The administration of the Scheme is simple.The employer has to send at the time of introduction and for annual renewal the employees’ salary and service data to LIC and pay the contribution that would be quoted by the LIC on the basis of the employee-data.
Particulars of new entrants have also to be intimated once a month. When the contingencies of retirement/ leaving service/death take place, the trustees will have to intimate the particulars to the LIC in simple claim form and the LIC will make the payment to the Trustees.
- d) Operation of LIC’s Gratuity Scheme:
LIC’s Gratuity Scheme operates on Cash Accumulation System:
This is a combination of Cash Accumulation plan and One Year Renewable Group Term Assurance(OYRGTA) plan. Cash Accumulation (C.A.) plan is based on the principle of pooled arrangement. Accordingly, as on the date of commencement of scheme, the initial contribution for past service gratuity as also the annual contribution for future service gratuity are determined on the basis of actuarial valuation of gratuity liabilities of all the members together. The rates of contributions are determined having regard to the probabilities of death, withdrawal and retirement, expected escalation in salary and the expected rate of interest to be earned. The annual contribution is expressed as a percentage of the total annual wage bill and unless there are significant changes in the assumptions made in the valuation, the rate of contribution generally holds good for a period of 3 years. Thereafter fresh valuation has to be made.
In view of the Accounting Standard 15 issued by the council of the Institute of Chartered Accountants of India, the actuarial valuation may be necessary every year. The employer may also require a certificate as per AS-15.
Out of the contribution received every year from the trustees of a Scheme, a part is utilised as OYRGTA premium and the balance is credited to running account of the scheme. In the event of retirement, leaving service or death the amount of accrued gratuity liability is paid out of the running account. The balance remaining in the running account earns interest till the end of the financial year at a rate declared by LIC for that financial year.
The interest accrual rate applicable under Cash accumulation policies comprises of a “BASIC INTEREST ACCRUAL RATE” and a “BONUS INTEREST ACCRUAL RATE”. The basic accrual rate is at present 8% p.a. and the bonus interest accrual rate is determined by the Corporation every year depending on the net yield earned/likely to be earned by us on cash accumulation funds. The basic interest accrual rate is guaranteed only for a period of five years from the date of commencement of the policy.
Where the contributions under new cash accumulation schemes are received in the first financial year in more than one instalments they will be counted to have been received as on the date of introduction ofthe policy for determining the rate of interest. THE INTEREST SHALL HOWEVER, BE ALLOWED ON DIFFERENT AMOUNTS FROM THEIR RESPECTIVE DATES OF RECEIPT.
The OYRGTA premium is charted to provide for life cover equal to total service gratuity less accrued gratuity in respect of all the members under One Year Renewable Group Term Assurance plan. In the event of death, this benefit becomes payable in addition to the accrued gratuity amount (i.e. past service gratuity) paid from the running account.
Minimum number of members required for introducing LIC’s Gratuity Scheme is 10.
Please call us at 7200039282 or 9962439282 for LIC’s Group Gratuity Scheme for your company. We offer complete service without ease.