Any organization which has been operating with a minimum number of 10 employees since the past financial year becomes liable to pay gratuity to those who have completed five years of continuous service; upon retirement or leaving the job. A gratuity is a mandatory lump sum amount to be given by the employer to workers under the Gratuity Act, 1972.
Every employer bears an obligation to each of his employees for his dedicated years of service in the organization. The gratuity is, thus, a benefit to be given when the employee retires or shifts job. It is a defined benefit plan, that is, an employee has the right to know the gratuity amount beforehand. The amount is calculated taking into account the last drawn salary and the number of years of service.
A gratuity scheme becomes mandatory automatically but, it is also necessary to be availed by any institution because of the uncertain market conditions and the resulting effects on the organization’s business. If an employer does not avail of a group gratuity scheme, he may not be able to fulfill his liability towards his workers in the form of the lump sum amount. In the absence of this scheme, he may have to forego a chunk of his savings and hamper his business functions to immediately pay up the gratuity to a retiring worker.
Thus, a group gratuity scheme is recommended to save the employer from any such financial worries in the future. This scheme will enable the employer to deposit fixed amounts at any time of the year to save up for the liability on account of the employees in the future. Apart from this basic benefit, a group gratuity scheme comes with several other benefits for the institutions that avail it.
The most significant of these benefits are from the taxation point of view. Whatever amount of money is invested by the organization in this scheme is considered as a business expense. So, it enables the employer to save up by reducing his taxable business income. However, to get this tax benefit, the gratuity must be paid according to the rules prescribed in the scheme.
The correct calculation of gratuity is made with a formula which is:
15/26*tenure of service*Last Drawn Salary
In order to contribute to the scheme in the current stage (when the employee has not yet retired or left), this calculation can be made on the current figures itself. However, at the time of retirement of any employee, there will be no complexity faced by the employer to pay up on the last drawn salary of the employee. This is because, at the end of each financial year, most insurers offer to review the data and revalue the liability based on changes in employees’ salaries, exits and the appointment of the new workforce. This enables the insured institution to remain up-to-date for meeting the prospective liability of each employee.
Also, a gratuity scheme enables an employer to maintain fair accounts. This means that if the gratuity amount is not deposited in the scheme for the respective year, then, according to the Indian Accounting Standards (AS-15), the accounts of a company are not considered true and fair. This may lead to a legal dispute in the future, hampering the company’s reputation and proper functioning.
Moreover, the funds that are deposited in the scheme do not become useless. They further multiply as one gets interests in the same. So, apart from being non-taxable for the employer, these funds generate tax-free profits; which is not a bad option to save and invest money.
A group gratuity scheme is flexible enough to bend the 5-year rule in case the employee faces death or disability. In such cases, add-on covers are also available to help the family or legal heirs of the employee to lead a stable life.
Thus, there is no doubt, whatsoever that a group gratuity scheme is a must for all small or large organizations. It is a policy that saves any institution from upcoming liability in the future and enables it to form a trustworthy relationship with employees. A suitable group gratuity scheme also helps the employer to attract talented employees and retain them for long tenures. It enables the employer to build a good reputation of the company in public view as all its retired employees or those who shift jobs after completion of 5 years; are bound to feel satisfied and spread a good word about the institution amongst the emerging young generation.
So, this group policy has long-term returns for the employers; which are hard to ignore.
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