Page 171 - Group Insurance and Retirement Benefit IC 83 E- Book

Comparison of Trustee Administered scheme and Insured Scheme:

The main advantages of an insured fund over a self-managed fund are as follows:

1. Possibility of earning a higher yield. Now that more private life insurers have entered

the market, different options are available for the companies to invest their gratuity funds.
Many funds are unit linked, and offer a higher return (however not guaranteed) with

options like secure fund, growth fund, balanced fund etc. There are also options for

switching from one fund to another.

2. Liquidity: Liquidity is better under the insured schemes, as whenever employees retire

or resign or die, the gratuity payable can be obtained from the insurer without any loss of
interest. But for self managed funds, either they have to keep liquid funds for paying

gratuity, which will result in loss of interest or sell securities at a loss to make the
payments.

3. Management: The problems of managing and investing the funds are removed from the

company. The insurance companies with huge funds have better expertise in investing

and hence may be able to get a better yield on the funds.

4. Additional death benefit: An additional death benefit equal to the future service
gratuity of an employee who dies in service is provided by a term assurance, for which an

extra risk premium has to be paid.

Accounting provision is only an entry in the books of accounts and gratuity when paid is

allowed as an ―expense‖ before arriving at Profit or Loss for the year.
Accounting provision is not allowed as deductible expenditure in computation of tax

liability.

However if you set up an Approved Gratuity Fund recognized under Part of the Fourth
Schedule to the Income Tax Act, 1961, the contribution to the Trust Fund is allowed as

deductible expenditure in terms of Section 36 (I) (v) of the Income Tax Act, 1961.