- Systematic Funding and gains: The scheme helps you to create adequate fund to meet your future liability without any strain. The contributions required will be considerably lesser than your actual liability.
- Taxation: LIC scheme is approved by income tax authorities. Hence you will get tax benefits @ 33% for the contributions made to create this fund. Employees also will get a tax free gratuity.
- Accounting Standards: Indian accounting standards (AS-15), needs all business organizations or institutions to provide for their employee liabilities in the respective year itself. Then only accounts are considered true and Fair.
- Prudence: It is financial wisdom and good practice to set apart the money when you are liable and financially sound. So there will be no liquidity issues in future.
- Profit : The fund you are setting apart is not idle at all. They earn the best possible returns in the market. So you are making tax free profits too by setting apart this fund.
- Employee Benefit:The scheme ensures full service gratuity even if premature exit due to risk. This ensures your status as a reputed Employer and build confidence among employees.
- Simplicity: There is no issue of fund management, actuarial valuation etc. for you because all these aspects will be taken care by LIC according to the regulations.
WORKING OF THE SCHEME
Based on the employee data (Date of joining, Date of birth, Name, Present salary: Basic+DA), we will arrive at your current liability in terms of gratuity. This is simply = expected future salary * 15/26 * number of years service completed.
This is payable at a future date. So you can contribute the present value of this amount now to start the scheme. Present Value is the discounted value of this amount based on interest and mortality assumptions and consequent actuarial valuation. When you remit this amount it will ensure that the gratuity liability on account of the already incurred service of your employees will be met properly at the respective exit of employees. Every year we will review the data and revalue the liability based on exits, entry, changes in salary and service. Accordingly the annual contributions are to be made.
The scheme is managed through a trust created by the institution or employer and whenever there is an exit for which gratuity is payable, LIC will issue the cheque to the employer’s trust for settlement of gratuity. The settlement is made from the fund maintained and to that extent; the fund balance will come down.
The fund is earning interest from the date of remittance till the date of withdrawal and completely under the control of the employer’s trust. LIC is only managing the fund and ensure better earnings to the funds subject to the satisfaction of income tax authorities so as to enable the employer to enjoy the income tax benefits.
| Benefits to Employer | Benefits to Employees |
| Lesser contribution than the actual liability. The Actual liability will be Past service *15/26*Salary. But the contribution required will be considerably less than this. | Tax free gratuity. The gratuity received at the hands of employees are tax free as per payment of gratuity Act 1972. |
| Income Tax benefits @ corporate tax rate of 33%.You can treat the contributions as current business expenditure even though gratuity is not actually paid. So there is no deferment of tax benefit | Risk coverage. Gives future service gratuity also to the employees. |
| Systematic funding of Gratuity. This liability grows along with service and salary. In due course this may become very huge. But the scheme helps to keep you out of worry about this liability through periodic systematic funding. | Timely payment. Payment on the same day of retirement through employer. |
| Competitive earnings to fund (9%). The fund earns not less than 9% on a daily basis. | Employee Welfare. |
| Compliance to accounting standards As 15. There will not be any audit objection to your accounts because the schemes ensures actuarial valuation of your liability and systematic funding. |
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