Group Gratuity Schemes: BY: Manjusha Arora Ankur Garg

GROUP GRATUITY SCHEMES
BY : Manjusha Arora Ankur Garg
GRATUITY
Gratuity is a lump sum amount that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan one of the many retirement benefits
An employee may leave his job for various reasons, such as -retirement/superannuation, - for a better job elsewhere, -on being retrenched, -by way of voluntary retirement.
PAYMENT OF GRATUITY ACT, 1972

An Act to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments
APPLICATION OF THIS ACT

Every factory (as defined in Factories Act), mine, oilfield, plantation, port and railway. Every shop or establishment to which Shops & Establishment Act of a State applies in which 10 or more persons are employed at any time during the year end. Any establishment employing 10 or more persons as may be notified by the Central Government. Once Act applies, it continues to apply even if employment strength falls below 10.
Who is eligible for gratuity and when?

Any person employed on wages/salary.
At the time of retirement or resignation or on superannuation, an employee should have rendered continuous service of not less than five years, In case of death or disablement, the gratuity is payable, even if he has not completed 5 years of service.
ALSO NOTE THAT AFTER THE COMPLETION OF 5 YEARS EVERY PERIOD IN EXCESS OF 6 MONTHS IS TREATED AS ONE COMPLETED YEAR.
FOR EXAMPLE IF AN EMPLOYEE HAS WORKED FOR 6 YEARS AND 8 MONTHS THAN HE WILL BE ELIGIBLE FOR A GRATUITY OF 7 YEARS.
AS PER THE NEW RULE, GRATUITY IS CALCULATED IF AN EMPLOYEE SERVES 4 YEARS AND 8 MONTHS IN AN ORGANIZATION AND NOT AS 5 YEARS.
Retirement and superannuation

Retirement means termination of the service of an employee otherwise than on superannuation; superannuation in relation to an employee, means the attainment by the employee of such age as is fixed in the contract or conditions of service as the age on the attainment of which the employee shall vacate the employment.
How to calculate gratuity?

For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories (a) Government employees and (b) Non-government employees covered under the Payment of Gratuity Act, 1972 (c) Non-government employees not covered under the Payment of Gratuity Act, 1972
In case of government employees they are fully exempt from receipt of gratuity. In case of non-government employees covered under the Payment of Gratuity Act, 1972 Maximum exemption from tax is least of the 3 below: (i) Actual gratuity received; (ii) Rs 350,000; (iii) 15 days salary for each completed year of service or part thereof In case of non-government employees not covered under the Payment of Gratuity Act, 1972 Maximum exemption from tax is least of the 3 below: (i) Actual gratuity received; (ii) Rs 350,000; (iii) Half-months average salary for each completed year of service (no part thereof)
Mr A had been working with an IT company since past 10 years, 7 months. He is retiring on 15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: As basic and DA have been the same since past 1 year. Lets consider 2 situations here (a) As employer is covered under Payment of Gratuity Act, 1972; and (b) As employer is not covered under Payment of Gratuity Act, 1972.
How does it work?
Employer Group gratuity plan
Own funds
Group gratuity scheme

Group Gratuity Plan is a special way to reward your employee's loyalty.
Absence of a good gratuity funding mechanism -financial strain -to pay out huge amounts in any year. Having a group gratuity plan enables an organisation to meet your legal obligations of providing gratuity in a hassle free manner. It offers additional insurance cover, to provide enhanced gratuity benefits in the event of unfortunate death of your employee.
Benefits of GGS to Employers

Contributions paid by employer up to 8.33% will be recognised as expenses for the year in B/S Reduce financial burden on the employer. In case of death of an employee during employment the nominee get gratuity amount till the date of retirement. This part is being taken care by LIC against the insurance premium paid by employer. Tax exemptions
Role of Actuary???
Actuarial computation of provision and expense has to be carried by an independent qualified Actuary in terms of the Revised Accounting Standard. Actuarial calculations are based on assumptions regarding happenings of contingent events. Main Actuarial Parameters are : Financial Parameters 1. Rate of Discount 2. Salary Growth 3. Expected Rate of Return on assets 4. Mortality rates and morbidity rate. 5. Withdrawal and retirements rates.
THANK YOU

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Group Gratuity Schemes: BY: Manjusha Arora Ankur Garg

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GROUP GRATUITY SCHEMES

BY : Manjusha Arora Ankur Garg

PAYMENT OF GRATUITY ACT, 1972

APPLICATION OF THIS ACT

Who is eligible for gratuity and when?

Retirement and superannuation

How to calculate gratuity?

How does it work?

Employer Group gratuity plan

Group gratuity scheme

Benefits of GGS to Employers

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