Investment Support Services for Gratuity Trust – Managing Approved Fund Investments Under IT Act Rules

Q: What investments are permitted for approved gratuity funds under Rule 107?

Central/State Government securities, Government-guaranteed bonds, PSU and all-India FI bonds, scheduled bank FDs and bonds, rated PSU debentures, and specified debt mutual fund units. Direct equity is not permitted.

Q: What is the minimum Government securities allocation required?

Historically 25% of the fund corpus must be in Central Government, State Government, or Government-guaranteed securities. This must be maintained continuously, not merely at year-end.

Q: How does the investment income of a gratuity trust get taxed?

Income of an approved gratuity fund is exempt from income tax under Section 10, provided the trust maintains its Fourth Schedule approved status.

Q: Can the gratuity trust invest in mutual funds?

Yes, in specified debt mutual fund categories permitted under Rule 107. We review current government notifications to ensure compliance with applicable categories and sub-limits.

Q: How should the trust manage liquidity for upcoming gratuity payments?

Maintain a rolling projection of upcoming payments and align portfolio maturities to benefit cash flows — avoiding forced liquidation of investments to fund claims.

Rule 107-Compliant Investment Advisory, Portfolio Management, and Yield Optimisation for Approved Gratuity Funds

The investments of an approved gratuity fund are governed by Rule 107 under Part C of the Fourth Schedule to the Income Tax Act, 1961. The rule prescribes the permissible categories of investment and mandates that a minimum proportion of the fund (typically not less than 25%) be invested in Central or State Government securities and other approved securities as notified by the Central Government. The balance may be invested in permissible instruments including bonds and debentures of public sector undertakings, banks, and financial institutions — subject to the specific sub-limits and conditions prescribed in Rule 107. Non-compliance with Rule 107 can trigger CIT adverse observations and jeopardise the trust's approved status.

Our investment support service assists trustee boards in designing and maintaining a Rule 107-compliant investment portfolio — while optimising yield within the prescribed limits. This service integrates with our trust management and annual compliance services to provide a seamless end-of-year investment schedule compliance certification for the CIT annual return.

Our Investment Support Services for Gratuity Trusts

Investment Policy Advisory

Preparation of the Trust Investment Policy Statement (IPS) — specifying permissible instruments, target allocation ranges, liquidity requirements, risk parameters, and yield objectives within Rule 107 limits.

Rule 107 Compliance Monitoring

Continuous monitoring of the trust's investment portfolio against Rule 107 prescribed limits — including the minimum Government securities allocation and sub-limits for each permitted instrument category.

Portfolio Yield Optimisation

Advisory on maximising portfolio yield within Rule 107 constraints — including instrument selection, maturity profiling for upcoming benefit payment requirements, and roll-over strategy for maturing investments.

Investment Accounting and Reconciliation

Maintenance of investment ledgers, mark-to-market or amortised cost accounting, income accrual, and reconciliation of investment balances against bank statements and custodian records.

Annual Investment Schedule for CIT

Preparation of the annual investment schedule as required under the Fourth Schedule for the CIT annual return — detailing each instrument, face value, cost, market value, and Rule 107 category classification.

Portfolio Restructuring Advisory

Advisory on restructuring the existing investment portfolio to comply with updated Rule 107 requirements, achieve better maturity alignment with projected benefit payments, or improve yield.

Why Investment Compliance Is Critical for Approved Gratuity Funds

Rule 107 compliance is a condition of CIT approval — any investment outside the permitted categories can be treated as a trust deed violation and trigger adverse CIT treatment
Maintaining the minimum Government securities allocation at all times protects the trust against CIT objections on the annual investment schedule
Optimised portfolio yield reduces the employer's annual contribution requirement — a higher-yielding portfolio narrows the gap between plan assets and DBO faster
Proper investment accounting and reconciliation ensures clean audit of trust accounts — supporting trustee accountability and CIT annual return accuracy
Liquidity management aligned to projected benefit payment obligations prevents forced liquidation of investments at unfavourable prices
Annual investment schedule accuracy is a direct input to the CIT annual return — errors here invite CIT queries and potentially delay approval of the contribution deduction

Frequently Asked Questions

What investments are permitted for approved gratuity funds under Rule 107?

Rule 107 under Part C of the Fourth Schedule to the IT Act prescribes permissible investment categories for approved gratuity funds. These include: Central Government securities; State Government securities; Government-guaranteed securities; bonds of public sector companies and all-India financial institutions; fixed deposits and bonds of scheduled banks; debentures or bonds of public sector companies above a prescribed credit rating; and units of specified mutual funds. Direct equity investment in shares of companies is not a permitted category.

What is the minimum Government securities allocation required?

Rule 107 requires that not less than a specified percentage of the fund corpus must be maintained in Central Government securities, State Government securities, and other Government or Government-guaranteed securities (commonly termed 'approved securities'). The specific percentage prescribed has historically been 25% of the fund. Trustees must monitor the portfolio to ensure this minimum is maintained continuously — not merely at year-end.

How does the investment income of a gratuity trust get taxed?

The income of an approved gratuity fund — including interest on bonds, FD income, and government securities yield — is exempt from income tax under Section 10 of the IT Act, provided the trust maintains its approved status under the Fourth Schedule. This tax exemption is a significant advantage over an employer simply maintaining a gratuity provision in its own books, where any interest notionally allocated to the provision earns no tax shelter.

Can the gratuity trust invest in mutual funds?

Rule 107 permits investment in units of specified mutual fund schemes — particularly debt mutual funds of specified categories. However, the specific permissible mutual fund categories may have been updated by government notification. Our investment advisory service reviews the most current Rule 107 notifications to ensure that any mutual fund investment made by the trust falls within the permitted categories and complies with applicable sub-limits.

How should the trust manage liquidity for upcoming gratuity payments?

The trustee board should maintain a rolling projection of upcoming gratuity benefit payments — based on known retirement dates, anticipated resignations, and actuarial probability estimates — and ensure that a portion of the portfolio is invested in liquid or near-maturity instruments to fund these payments without forced liquidation. Our investment support service provides liability-driven investment (LDI) advisory to align the portfolio's maturity profile with the trust's anticipated benefit payment cash flows.

Optimise and Protect Your Gratuity Fund Investments

Rule 107-compliant investment advisory, portfolio management, and annual compliance certification for approved gratuity funds.