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Banks seek review of tax exemption limit on gratuity
January, 15th 2008
Banks, which will now be required to set aside higher provisions for employee gratuities under the new accounting norms, have urged the government to relax the tax exemption limit.

At present, banks can claim exemption of taxes on gratuity contributions only up to 8.33% of employee salaries. However, with the increased provisioning requirements, banks will now set aside larger amounts and have thus urged the government to review the tax exemption limit on this count.

Under the income tax rules applicable to the gratuity fund, the employer will not be able to fund the shortage in the gratuity liability. Contribution to the gratuity fund over 8.33% will not be exempt from tax. The industry has sought an amendment to be made in IT Rules 103 and 104, allowing the employers to make contribution without being restricted to the 8.33% cap to meet increased liability as a fall out of new accounting standards, says a senior banker with a public sector bank.

Experts feel that valuation of gratuity liabilities will undergo a major shift with the introduction of these accounting changes. Employers usually counted on actuarial assumptions arrived at by insurance companies or actuarial professionals. However, now employers themselves have to spell out their assumptions on projected salary growth and are answerable to auditors regarding the provisioning for gratuity.

As per section 36(1)(v) of the Income-tax Act, any sum paid by the employer by way of contribution towards an approved gratuity fund is allowable as tax deductible expense. But rules 103 and 104 of the Income-tax Rules, 1962 puts a limit of 8.33% of salary of each employee to be contributed to the approved gratuity fund during each year.

Also, under provisions of section 40A (7), any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason shall not be allowed as deduction. This is to ensure that employers must necessarily make contribution to the gratuity fund instead of merely making provisions for the same.

The accounting standards prescribe stipulations with respect to valuation of liabilities and assets of gratuity schemes. Employers contribution in the following years is likely to be very high and well in excess of the limit of 8.33% per annum, the Indian Banks Association (IBA) has said.

The employer is also statutorily required to contribute 12% of the salary towards Provident Fund. Out of the employers contribution, 8.33% goes towards the pension fund (subject to maximum of Rs 541 per month) while the balance 3.67% goes towards the provident fund.
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