Gratuity Trust Services – Approved Gratuity Fund Setup, Compliance, and Management

Q: What is an approved gratuity fund under the Income Tax Act?

An irrevocable employer trust approved by the Commissioner of Income Tax under Part C of the Fourth Schedule to the IT Act. Contributions are deductible under Section 36(1)(v) and investment income is tax-exempt.

Q: Is it mandatory to set up a gratuity trust?

Section 4A of the Payment of Gratuity Act requires employers with 10+ employees to either hold a group gratuity insurance policy or establish an approved gratuity fund.

Q: What is the tax benefit of contributing to an approved gratuity fund?

Contributions are deductible under Section 36(1)(v) up to the actuarially determined annual service cost. Without an approved fund, provisions for gratuity are disallowed under Section 40A(7).

Q: Who manages an employer-managed gratuity trust?

A Board of Trustees — typically senior management representatives — appointed under the trust deed, responsible for investments, claim payments, regulatory filings, and Fourth Schedule compliance.

Q: Can a group gratuity policy with LIC be converted to an employer-managed trust?

Yes. The process involves setting up the trust, obtaining CIT approval, and transferring the corpus from the insurer. Our team manages the complete conversion.

End-to-End Advisory for Employer-Managed Approved Gratuity Funds Under the Payment of Gratuity Act and the Income Tax Act

Gratuity is a statutory employee benefit payable under the Payment of Gratuity Act, 1972 (PGA) to employees who have completed five or more years of continuous service with an employer. Under Section 4A of the PGA, every employer with 10 or more employees is required to obtain a policy of insurance with LIC or another approved insurer, or to establish an approved gratuity fund, to secure the gratuity liability. Employers who establish and maintain an approved gratuity fund under Part C of the Fourth Schedule to the Income Tax Act, 1961 gain a significant additional advantage: contributions to the fund are immediately tax-deductible under Section 36(1)(v) of the Income Tax Act, enabling accelerated pre-funding of the gratuity liability and improved tax efficiency.

Our gratuity trust practice covers the complete lifecycle of employer-managed approved gratuity funds — from trust registration and income tax approval through day-to-day administration, regulatory compliance, annual filings, investment management, and lifecycle events such as trust amalgamation, demerger, deed amendments, and winding up.

Our Gratuity Trust Services

Trust Registration & IT Approval

Trust deed drafting, sub-registrar registration, and Commissioner of Income Tax approval for employer-managed approved gratuity funds under the Fourth Schedule.

Gratuity Trust Management

Day-to-day administration — trustee meetings, actuarial valuations, benefit claim processing, fund accounting, and regulatory return filing.

Group Gratuity Compliance

Ongoing regulatory compliance for approved group gratuity trusts — investment compliance, Fourth Schedule adherence, and CIT reporting.

Annual Compliance Filing

Annual statutory filings — CIT annual returns, audited trust accounts, actuarial reports, and investment schedule compliance.

Investment Support

Investment advisory and compliance — ensuring approved gratuity fund investments comply with Rule 107 under the Fourth Schedule to the IT Act.

Trust Restructuring

Advisory on amalgamation, demerger, deed amendments, and winding up of approved gratuity trusts.

Why an Approved Gratuity Trust Is the Preferred Structure

Immediate income tax deduction under Section 36(1)(v) on employer contributions — versus the Section 40A(7) disallowance on mere provisions for gratuity
Prefunding of actuarially determined gratuity liability reduces cash-flow shock at the time of large-scale retirements or retrenchments
Ring-fenced trust corpus protects employees' gratuity entitlements from the employer's business creditors
Investment returns on the trust corpus grow tax-free within the approved fund — improving the fund's long-term ability to meet gratuity obligations
Compliance with Section 4A of the Payment of Gratuity Act — fulfilling the employer's statutory obligation to secure gratuity liabilities
Employer control over investment strategy (within prescribed limits) — allowing yield optimisation that may not be available under an LIC group gratuity policy

Frequently Asked Questions

What is an approved gratuity fund under the Income Tax Act?

An approved gratuity fund is an irrevocable employer-created trust established to prefund and secure employees' gratuity entitlements. To obtain 'approved' status, the trust must be registered with the sub-registrar under the Registration Act and must obtain approval from the Commissioner of Income Tax (CIT) under Part C of the Fourth Schedule to the Income Tax Act, 1961. Once approved, employer contributions up to the actuarially determined annual service cost are deductible under Section 36(1)(v).

Is it mandatory to set up a gratuity trust?

Under Section 4A of the Payment of Gratuity Act, every employer with 10 or more employees must either obtain a group gratuity insurance policy with LIC or another IRDAI-approved insurer, or establish an approved gratuity fund. While both options fulfil the PGA obligation, an employer-managed approved gratuity trust (rather than an LIC policy) is preferred by many large employers for the tax deductibility, investment flexibility, and cost efficiency it offers.

What is the tax benefit of contributing to an approved gratuity fund?

Employer contributions to an approved gratuity fund are deductible under Section 36(1)(v) of the Income Tax Act — up to the amount determined by an actuary as the annual service cost for the year. Without an approved fund, any provision or reserve created for gratuity liability in the employer's books is disallowed under Section 40A(7). This difference makes the approved fund structure significantly more tax-efficient for large employers with substantial gratuity liabilities.

Who manages an employer-managed gratuity trust?

The trust is governed by a Board of Trustees — typically comprising senior management representatives of the employer — appointed under the trust deed. The trustees are responsible for investment decisions, claim payments, regulatory filings, and overall compliance with the trust deed and the Fourth Schedule conditions. Our trust management service assists the trustee board with all administrative, actuarial, accounting, and compliance functions.

Can a group gratuity policy with LIC be converted to an employer-managed trust?

Yes. Many large employers convert their existing LIC or insurer-managed group gratuity policies to self-managed approved gratuity trusts to gain greater investment flexibility and cost efficiency. The conversion process involves setting up the trust, obtaining CIT approval, and transferring the corpus from the insurer to the trust. Our team manages the complete conversion process.

Set Up or Optimise Your Gratuity Trust Today

Complete advisory for approved gratuity fund setup, compliance, and lifecycle management.