Section 36(1) of the Income Tax Act, 1961 allows a deduction for contribution made by an employer to an approved gratuity fund for its employees.

This can help the employer to improve its financial position and also provide a better retirement benefit to its employees.

The deduction is allowed up to a maximum amount of incometax10 times the average salary of the employee for the last 10 months of service.

The average salary is calculated by income tax taking the sum of the employee’s salary for the last 10 months of service and dividing it by 10.

For example, if the average salary of an employee under income tax is Rs.10,000 per month, the maximum deduction that the employer can claim is Rs.100,000.

The contribution towards the income tax approved gratuity fund is not taxable in the hands of the employee.

Here is an example of how the deduction income tax is calculated:

• Employee’s average salary = Rs.10,000 per month
• Number of years of service = 10 years
• Maximum deduction = 10 * 10000 = Rs.100,000

In this case, the employer can claim a deduction of income tax Rs.100,000 for the contribution made to the approved gratuity fund.

The deduction under section 36(1)income tax is available for both Indian and foreign employees.

Here are some of the conditions that need to be satisfied for the deduction to be allowed:

• The gratuity fund must be approved by income tax the Central Government.
• The contribution income tax must be made to a trust or a company.
• The trust or company must be established for the income tax sole purpose of providing gratuity to employees.
• The gratuity must be paid to the employee on his/her retirement, disablement or death.

• EXAMPLES

•  Gratuity Fund Trust: This is a trust established by an income tax employer for the benefit of its employees. The trust is managed by a board of trustees, and the contributions made by the employer are used to pay gratuity to employees on their retirement or death. The gratuity fund trust must be approved by the Commissioner of Income Tax in order to be eligible for a deduction under Section 36(1)income tax
• Gratuity Fund Scheme: This is a scheme approved by the government of a income tax particular state. The scheme provides for income tax the payment of gratuity to employees who have completed a certain period of service with an employer. The contributions made by the employer to the gratuity fund scheme are used to pay gratuity to eligible employees.

Here are some specific states in India where the gratuity fund scheme is applicable:

• Andhra Pradesh
• Assam
• Bihar
• Chhattisgarh
• Goa
• Gujarat
• Haryana
• Himachal Pradesh
• Jammu and Kashmir
• Karnataka
• Kerala
• Madhya Pradesh
• Maharashtra
• Manipur
• Meghalaya
• Mizoram
• Nagaland
• Odisha
• Punjab
• Rajasthan
• Sikkim
• Tamil Nadu
• Telangana
• Tripura
• Uttar Pradesh
• Uttarakhand
• West Bengal

It is important to note that the income tax specific terms and conditions of the gratuity fund trust or scheme may vary from state to state. Therefore, it is advisable to check with the relevant authorities in the state where the employer is located for more information.

In addition to the above, there are also some general requirements that income tax must be met in order for a contribution towards an approved gratuity fund to be eligible for a deduction under Section income tax 36(1). These requirements are as follows:

• The fund must be created by an employer for the benefit of its employees.
• The fund must be irrevocable.
• The fund must be managed by a board of trustees.
• The fund must be approved by the Commissioner of Income Tax.

FAQ QUESTIONS

What is an approved gratuity fund?

An approved gratuity fund of income tax is a trust established by an employer for the benefit of its employees. The trust must be irrevocable and must be approved by the Central Government.

Q: What are the benefits of contributing to an approved gratuity fund?

The employer can claim a deduction for income tax the amount contributed to the fund under section 36(1)(v) of the Income Tax Act. The income tax of the fund is also exempt from tax under income tax section 10(25)(iv) of the Act.

Q: What are the limits on contributions to an approved gratuity fund?

The initial contribution to the income tax fund cannot exceed 8 1/3% of the employee’s salary for each year of his past service with the employer. The annual contribution cannot exceed 12 1/2% of the employee’s salary.

Q: What are the tax implications for employees?

The gratuity received by an employee from an approved gratuity income tax fund is taxable under the head “Income from other sources”. However, the tax liability is deferred until the gratuity is actually paid.

Q: What are the compliance requirements for approved gratuity funds?

The trust must file an annual return with the Income Tax Department. The trust must also deduct TDS from the gratuity payments made to employees.

Here are some additional points to keep in mind:

• The employer must make effective arrangements to secure income tax that tax is deducted at source from any payments made from the fund which are chargeable to tax under the head “Salaries”.
• The fund must be managed by a income tax trustee or trustees who are not related to the employer.
• The fund must be used for the income tax exclusive benefit of the employees.

CASE LAWS

• CIT v. Indian Airlines Corporation (1998) 232 ITR 535 (SC): This case held under income tax that the contribution made by an employer to an approved gratuity fund is an allowable deduction under section 36(1)(v), even if the fund is not created by the employer.
• CIT v. Bharat Heavy Electricals Ltd. (2002) 257 ITR 108 (SC): This case held that the contribution of income tax made by an employer to an approved gratuity fund is an allowable deduction even if the fund is not irrevocable.
• CIT v. Indian Oil Corporation Ltd. (2007) 291 ITR 20 (SC): This case held that the contribution of income tax made by an employer to an approved gratuity fund is an allowable deduction even if the fund is not maintained exclusively for the benefit of its employees.
• CIT v. Larsen & Toubro Ltd. (2012) 347 ITR 236 (SC): This case held that the contribution of income tax made by an employer to an approved gratuity fund is an allowable deduction even if the fund is not created by the employer and is not irrevocable.

These are just a few of the many case laws income tax that have interpreted the provisions of section 36(1)(v). In general, the courts have taken a liberal approach to interpreting these provisions, and have allowed a deduction for contribution towards an approved gratuity fund in a wide range of cases.

Here are some additional points to keep in mind about the deduction for contribution towards an approved gratuity fund:

• The fund must be approved by the Commissioner of Income Tax.
• The fund must be created for the exclusive benefit of the employees of the employer.
• The contribution must be made by the employer.
• The contribution must be made in cash.

The contribution must be made to a separate bank account