Gratuity Trust
STAC will seek quotation from 4-5 insurance companies who are effectively managing group gratuity funds. We will help client in shortlisting the insurance company.
STAC will draft / review the trust documents for filing application with the income tax authority.
STAC will liaise with the insurance company and review the relevant documents required for opening of the Gratuity scheme with the insurance company. We will help coordinate between the client company and insurance company for finalization of the scheme documents and payment of initial contribution.
We will scrutinize the Master policy issued by the insurance company and coordinate with the insurance company for the issuance of addendum to Master policy, in case of any discrepancy in the Master policy as compared to the trust rules.
Advantages of creating a Gratuity Trust in India:
Tax Benefit : A Gratuity Trust can provide tax advantages for both the employer and the employee. Contributions made by the employer to the trust are eligible for tax deductions, and the gratuity payments made to employees are exempt from income tax up to a certain limit.
Employee Retention and Motivation: Offering a gratuity scheme through a trust can be a valuable tool for attracting and retaining talented employees. It demonstrates the employer's commitment to their long-term welfare and can enhance employee motivation and loyalty.
Professional Management: By establishing a trust, employers can delegate the responsibility of managing gratuity funds to professional trustees or fund managers. This can ensure that the funds are invested and managed prudently, minimizing the risk of mismanagement.
Establishing a Gratuity Trust in comparison to a pay-as-you-go system can provide certain cash flow benefits. Here's how a Gratuity Trust can positively impact cash flow:
Predictable cash flow management: With a Gratuity Trust, the employer contributes to the trust periodically based on a predetermined formula or percentage of employees' salaries. This allows for better cash flow planning, as the employer knows in advance the amount that needs to be set aside for gratuity payments. It provides greater predictability and helps in managing cash flow more effectively.
Spread out liability: In a pay-as-you-go system, the employer is obligated to pay gratuity when an employee leaves the organization. This can result in significant cash outflows if multiple employees depart simultaneously. By establishing a Gratuity Trust, the employer can spread out the gratuity liability over time by making regular contributions to the trust. This helps in better cash flow management and reduces the financial burden of lump-sum gratuity payments.
Investment returns: The funds contributed to a Gratuity Trust are invested to generate returns over time. These investment returns can help offset the gratuity liability, reducing the overall cash outflow required by the employer. By earning investment income on the trust corpus, the employer can partially or fully fund gratuity payments without a substantial impact on cash flow.
Cost averaging: When the employer contributes to a Gratuity Trust regularly, it allows for cost averaging. Cost averaging is the practice of investing a fixed amount regularly, regardless of market conditions. This strategy helps in smoothing out the impact of market fluctuations and reduces the risk of making large cash outlays during unfavorable market conditions.
Flexibility in funding: Establishing a Gratuity Trust offers the flexibility to choose how contributions are made. Employers can structure their contributions based on their cash flow capabilities. For example, they can contribute a fixed amount or a percentage of the payroll, depending on their financial situation. This flexibility allows the employer to align gratuity funding with their cash flow patterns and financial goals.
Disadvantages of creating a Gratuity Trust in India:
Initial Setup Costs: Setting up a Gratuity Trust involves certain administrative and legal expenses. These costs can be a deterrent for very small organizations or businesses with limited resources.
Regulatory Compliance: Establishing and managing a Gratuity Trust requires compliance with various legal and regulatory requirements, such as filing regular reports, maintaining records, and adhering to the guidelines set by the Income Tax Department and other authorities.
Limited Flexibility: Gratuity Trusts have specific rules and guidelines regarding the utilization of funds. Employers may have limited flexibility in utilizing the trust funds for other business purposes, as the funds are primarily meant for gratuity payments.
Dependency on Trust Performance: The performance of the trust's investments can affect the gratuity payout. If the trust's investments underperform or face losses, it may impact the ability to provide adequate gratuity benefits to employees.