Statutory Regulations The world of statutory regulations is always evolving, and the latest buzz is all about gratuity following the gazetting of mandatory insurance for gratuity contributions and liabilities. But what does this mean for businesses? Let’s delve into the details. Firstly, it’s essential to understand that gratuity isn’t a new act; it has always been applicable toestablishments with 10 or more employees. Previously, businesses falling under this mandate were required to obtain the LIC of India Gratuity policy. However, LIC of India didn’t cover establishments with fewer than 500 employees in a unit. Challenges and Innovations in Gratuity Fund Management: A Financial Perspective In response, some establishments devised alternative methods, such as setting aside funds in separate bank accounts or fixed deposits, which were reconciled with gratuity payable at the end of the financial year and validated by an actuary. However, it became evident that many establishments weren’t parking the funds as required, instead reflecting the liability in their financials or even neglecting to account for gratuity altogether until it was time for payment. State Governments Take Action: Mandatory Gratuity Insurance Implementation This lax approach led to grievances from employees who found themselves short-changed when leaving their jobs, as companies either couldn’t afford to pay due to losses or had shut down entirely, leaving no recourse for gratuity claims. Recognizing the need for reform, some state governments took action, gazetting notifications over the past year. The Government of Karnataka, for instance, officially implemented such a notification from January 1, 2024. With the close of the financial year, it’s now mandatory for establishments to secure insurance coverage for gratuity. Optimizing Gratuity Management: Establishing Unregistered Trusts Under the Income Tax Act So, what’s the best course of action for businesses navigating this new landscape? One option is to establish a trust under the Income Tax Act specifically for gratuity purposes. This unregistered trust would require a minimum of two trustees from management, or one trustee from management and one from the employees’ side, with the possibility of additional employee representation. Here’s how it works: the establishment transfers its gratuity liability to the trust, initially as of March 31, 2024, and annually adjusts this amount based on calculations at the year’s end. The trust then invests these funds with an insurance company. When an eligible employee leaves the company, the establishment notifies the trust, which, in turn, informs the insurer to settle the employee’s gratuity. Unlocking Tax Benefits: The Win-Win Strategy of Establishing Gratuity Trusts By opting for this approach, the establishment can treat the funds paid to the trust for gratuity as an expense in its books, thus benefiting from tax exemptions. It’s a win-win situation that ensures employees receive their due gratuity while providing tax advantages to the business. In conclusion, as the regulatory landscape surrounding gratuity evolves, it’s crucial for businesses to adapt and comply with the latest requirements. Establishing a trust for gratuity management offers a streamlined solution that benefits both employers and employees alike. For further clarification or assistance, we’re just a Zoom call away. Feel free to share this information with your business colleagues to help them navigate this complex terrain effectively.