Under the Payment of Gratuity Act, 1972, it is employer’s statutory liability to pay 15 days salary (15/26 of a month’s wages) for every completed year of service to each of his employees on their exit, for any reason after five years of continuous service, subject to maximum limit of 20 lacs.
Gratuity payable to the employees can be paid as and when liability arises and can be claimed as deductible expense under P & L A/c of the relevant financial years.
Gratuity is a statutory liability of most of the employers which accrues to an employee for every year of service put in by him. As the liability accrues every year, as per sound accounting practices, it is desirable to provide for this liability before the profits are determined.
The Group Gratuity Scheme provides a scientific method for funding gratuity liability as the premiums are based on actuarial principles. The attractive feature of the scheme is the life insurance cover for every employee due to which in the event of the premature death of an employee, his dependants become entitled to substantially higher benefits.
Contribution to Gratuity Fund with LIC is allowed as Business Expenses under Section 36 (1)(v) and Interest Income on Fund is exempt under Section 10(25)(iv).
When the fund is handed over to LIC, the Company will not be required to obtain the certificate from outside actuary since the valuation done by LIC would suffice for the purpose of claiming income tax rebate.
Security:-
The most important aspect above all is SECURITY OF THE FUNDS INVESTED since these are EMPLOYEE WELFARE FUNDS. Funds invested with the Corporation (LIC) enjoy SOVERIGN GUARANTEE of Central Government of India and the same is expressly provided under Section 37 of the LIC of India Act, 1956, passed by none other than Parliament of India, i.e. 100% security of Funds invested with LIC.
Liquidity:-
Life Insurance Corporation of India is a financial power house and can ensure 100% liquidity of the funds invested.