Organizations which has a minimum number of 10 employees since the past financial year becomes liable to pay gratuity.
Employers pay gratuity to workers who have completed five years of continuous service upon retirement or job departure. The Gratuity Act, 1972 mandates employers to provide a lump sum amount as gratuity. There are many benefits of Group Gratuity Insurance for organization, both small and large in size.
Every employer bears an obligation to each of his employees for his dedicated years of service in the organization. The gratuity, thus, benefits the employee when they retire or change jobs. It is a defined benefit plan, that is, an employee has the right to know the gratuity amount beforehand. The amount is calculated based on the employee’s last drawn salary and years of service.
Gratuity becomes mandatory and necessary for institutions due to uncertain market conditions and their business impacts. Without a group gratuity policy, employers may be unable to fulfill their liability to workers for lump sum payments.
Without this scheme, the employer might need to use savings and disrupt business functions to pay retiring worker’s gratuity.
Thus, it is recommended for employers to opt for a group gratuity plan to avoid future financial worries.
This scheme allows the employer to deposit fixed amounts anytime to save for future employee liabilities. Apart from this basic benefit, a gratuity insurance 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.
To avail of this tax benefit, employers must pay the gratuity in accordance with the prescribed scheme rules.
The correct calculation of gratuity is made with a formula which is:
Formula to calculate gratuity under Group Gratuity Insurance
15/26*tenure of service*Last Drawn Salary
Employers pay gratuity to workers who have completed five years of continuous service upon retirement or job departure. The Gratuity Act, 1972 mandates employers to provide a lump sum amount as gratuity. 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.
If the gratuity amount is not deposited in the scheme for the respective year, Indian Accounting Standards (AS-15), deem the company’s accounts as not true and fair. This may lead to a legal dispute in the future, hampering the company’s reputation and proper functioning.
Moreover, the deposited funds 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 plan 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, a group gratuity insurance 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 policy also helps the employer to attract talented employees and retain them for long tenures. Implementing the scheme enables the employer to enhance the company’s reputation in the public eye. Retired employees and those who switch jobs after five years will feel satisfied and speak positively about the institution to the younger generation.
So, benefits of Group Gratuity Policy for organization are the long-term returns for the employers; which are hard to ignore.
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