Page 170 - Group Insurance and Retirement Benefit IC 83 E- Book

Creation of Internal Reserve:
After the introduction of Section 40A(7) of the Income Tax Act, it is not possible to

obtain income tax relief on the internal reserve created by the mere accounting provision
in the books. But companies, which in their initial years of existence and which do not

have too much of profits can, adopt this method. Their liability in respect of gratuity will
relate to only death gratuity, which will be very small and as employees resigning before

completing 5 years of service are not eligible for gratuity.

Funding through Trust:

The employer is required to part with the proprietary control over the funds. The gratuity

rights of the employees become independent of the business fortunes. The reserves are
setup on the basis of the concept of going concern where most of the employees would

retire from service on attaining specific age, but for early death or resignation.

Trustee Administered Fund
If the trustees decide to manage the gratuity funds themselves, then it will be their

responsibility to arrange for investment of the contributions according to the pattern

prescribed by the rule 101 of the IT Act. The rate of contribution will have to be
determined scientifically by an actuarial valuation of the liability and the same has to be

reviewed periodically.

Insured Group Gratuity Scheme:
While extending the advantages of immediate income tax relief to the employer and

security to the employees, the trustees can enter into a Group Gratuity Scheme with the

insurer. It has two fold advantages, relieving the trustees of the responsibilities of
investment of contribution and administration of the fund and provision of higher amount

of gratuity payable in the event of death of employee while in service.