An Approved Gratuity Fund is a retirement benefit scheme set up by an employer to provide gratuity payments to employees upon retirement, resignation, or death. To be termed "approved," the fund must receive formal approval from the Commissioner of Income Tax under the Income Tax Act, 1961.
Gratuity is a statutory benefit under the Payment of Gratuity Act, 1972, and setting up an approved fund allows businesses to manage gratuity liabilities efficiently while enjoying specific tax benefits. Contributions made by the employer to an approved gratuity fund are treated as a deductible business expense under Section 36(1)(v) of the Income Tax Act. Moreover, the income earned by the fund is exempt from tax, and gratuity received by employees from such funds is either fully or partially tax-exempt under Section 10(10).
For small business owners and startups, establishing an approved gratuity fund not only ensures statutory compliance but also boosts employee retention and financial planning. It is particularly relevant while filing income tax returns, managing payroll structures, and making long-term financial provisions for employee welfare.
Proper registration, adherence to compliance norms, and periodic filings are essential to maintain the fund's approved status. For end-to-end support on income tax compliance and structuring such funds, you can explore FinTax24's income tax solutions.
In summary, an Approved Gratuity Fund is a tax-efficient and legally compliant way for Indian businesses to meet their gratuity obligations while offering a valuable financial benefit to their employees.