Under the Payment of Gratuity Act, 1972, it is the employer's statutory liability
to pay 15 days' salary (15/26 of a month's wages) for every completed year's service
to each of his employees on their exit, for any reason after five years of continuous
service, subject to maximum limit of 3.5 lacs. Higher benefits can be paid if the
employer so desires. Gratuity payable to the employees can be paid as and when liability
arises and can be claimed as deductible expense under P & L A/c of the relevant
financial years. However, the sound system of financial management envisages providing
for Gratuity liability every year and claiming the tax benefits as it is mandatory
as per Accounting Standards 15 (AS15) to account for the liability on Actual basis.
This can be done by creating a Trust, managed privately or by LIC and paying the
amount to the Trust every year. In case of Privately Managed Trust, investment of
funds will have to be done as per Income-Tax Act, by the trustees and entire administration
of the Trust including Actuarial Valuation will be the responsibility of the Trustees.
In case of LIC managed trust, the job of investment and actuarial valuation is taken
over by the corporation free of charge and in addition, interest is paid by the
Corporation on the accumulated funds.