When an employee serves an employer for a long tenure, continuously, the employer rewards the employee on termination or retirement. One such benefit that the employer pays is gratuity.
Gratuity is a mandatory benefit that employers are required to pay eligible employees. The benefit has been mandated under the Gratuity Act of 19721, which also mandates the eligible employees who receive the gratuity payment. Gratuity is paid when the employee leaves the company and is an additional benefit.
Since gratuity is a mandatory payment for employers, they tend to create a provision for the same to avoid a sudden financial shock when the benefit becomes due. One of the ways to create the provision for gratuity payment is the group gratuity scheme.
The concept of a group gratuity scheme:
A group gratuity scheme undertakes the employer’s gratuity liability. The employer can invest in the scheme and pay a regular amount of money to create a provision for gratuity. After that, when employees retire, the group gratuity scheme pays the gratuity to employees on behalf of the employer, as and when due.
Gratuity differs from the concept of life insurance plans, wherein in gratuity, the entire payment is made by the employer, whereas in life insurance, the premium can be paid either by the employer, as in the case of group insurance or by the individual, as in the case of individual insurance plans. A life insurance calculator can be used to calculate the premium of the plan for your reference.
Importance of the group gratuity scheme:
Gratuity is a compulsory payment for employers. They can either choose to pay the gratuity as and when it becomes due or create a provision for the same through the group gratuity scheme. The scheme prevents a dent in the employer’s finances when gratuity falls due. In the case of mass termination or attrition, gratuity payments to multiple employees at the same time might affect the profitability of the business. This can be avoided through the group gratuity scheme. The scheme takes care of the gratuity liability, irrespective of the amount involved.
How does the group gratuity plan work?
An employer can invest in the group gratuity scheme. Once bought, the employer pays towards the scheme, and the payment gets accumulated into a corpus. After that, as and when the employees retire, the scheme pays the due gratuity, and the employer’s finances don’t take a hit.
Benefits of a group gratuity scheme:
The benefits of a group gratuity scheme are as follows –
It relieves the employer of the financial liability of gratuity:
The group gratuity scheme undertakes the liability of gratuity payment on behalf of the employer. This relieves the employer from worrying about the gratuity liability. The gratuity gets paid automatically without the employer having to worry about arranging the funds for the same.
The scheme also earns additional returns:
Gratuity schemes invest in the employer’s contribution to financial markets. There are traditional as well as unit-linked gratuity schemes. Both these plans earn returns on the invested amount so that the corpus grows and pays the increasing gratuity liability easily.
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The scheme ensures that the employees are paid gratuity timely even when the employer is not financially healthy.
Why buy a group gratuity plan?
A group gratuity scheme is a systematic way to provide gratuity payments. Through the scheme, employers can transfer their gratuity liability to the insurer and ensure its timely payment. The premiums for the policy are affordable so that employers can provide gratuity payments without incurring financial debt.
The bottom line
A group gratuity scheme is a better way to pay for the employees’ gratuity as it creates a systematic investment corpus. The scheme has affordable premiums so that employers do not feel the pocket pinch and employees get timely gratuity payments.
Do group gratuity schemes offer any tax benefits?
The premium paid towards the group gratuity scheme is allowed as an eligible expenditure for the employer when calculating the taxable profit. Thus, the scheme lowers the tax liability for employers.
Is the gratuity amount taxable?
The gratuity amount received by employees is tax-free up to specified limits.
How to calculate the gratuity amount?
The gratuity amount is calculated using the following formula – 15/26 * last drawn salary * total service tenure.
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