Adopting the Gratuity Scheme is inevitable for companies. If they have more than 10 employees in their company, it is mandatory for them to pay gratuity to the employee who falls under the eligibility criteria mentioned in The Payment of Gratuity Act, 1972.
However, a business, especially when it is seasonal or recovering from a loss, finds it hard to pay the gratuity amount to its employees. In order to stay better prepared for the same, give below is a list. Read it carefully so that you know the current state of your business and the funds that you may want to keep aside.
Gratuity Scheme And Avail Tax Benefits
Recognise the liabilities-
Companies need to understand the liability that employees have when it comes to gratuity the companies have to give to the employees. To calculate the liability, you must find the actual valuation of AS 19 and AS 15. By not setting the funds aside, the companies end up worsening the situation for themselves. By running unfunded gratuity schemes there are high chances of their business landing up in a troublesome situation. So, it is always better to have a funded scheme. The companies can set the funds aside beforehand for the gratuity scheme. There is no set limit for the funding, companies can decide the amount on their own.
If you see from employee’s perspective the gratuity calculation formula is what they struggle with & fixed deposits benefits, but when you look at it from the employer’s perspective, finding out the tax benefits is a challenge. However, finding out the tax benefits is quite easy if you have a funded gratuity account. Speaking about the annual sum, as much as 8.33% of the basic salaries when paid is the gratuity fund is treated a tax-deductible expense. Investment income or interest earned from the gratuity fund is also free of tax. So, clearly, if you plan the funding rightly, you can save a lot of money on the tax bill.
The companies need to have cash saved separately for the business from their business for gratuity trust. What you to consider here the most are the other ways that cash could be used and the return that this cash can give. The interest in gratuity fund is absolutely tax-free. Pre-tax return can range from 10% P.A is equal to 14% P.A if it is grossed up for 30% tax.
Companies need to know that if their liabilities are unfunded, they may face greater difficulty in paying the gratuity amount to employees leaving. The situation will aggravate if the employees who are leaving was a highly paid one. The cash flow position of a company can deteriorate easily with this. If the scheme is rightly founded, over the years the payment amount will be saved without impacting the financial stability of the company.
After setting the funds aside, you must have a well-thought investment strategy in place. The same will not only give the best of returns but also help you in deducing the employee cost. The gratuity calculation formula components should be kept in mind while the employer is trying to build a strategy for his company. Thinking that third party support would be better for small to medium size companies would be wrong. The company owners and the HR, administrators know their business in the best manner. You may need to brainstorm, but you will surely be able to devise a more suitable strategy.
The decision to fund or keep the gratuity scheme unfunded is yours. But, to meet your overall business objectives, stay in a profitable business, keeping the scheme funded is the best. Do not overlook this concern, you will end up being in better liquidity and stability position. So, go ahead, brainstorm and fund your gratuity now!