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MK Finserve > Employees Group Gratuity Scheme

Employees Group Gratuity Scheme

Employees Group Gratuity Scheme:

The payment of Gratuity to the employees is a statutory liability imposed on the employers through an act of the Government called Gratuity Act 1972.

The gratuity liability of the employer always increases year after year as the number of years of service of the employees and their salary increase.

Every employee who has completed 5 years of service on their exit from the company is entitled to enjoy the benefit of Gratuity act subject to maximum of Rs. 10,00,000/-.    The exit of the employees may be due to the following reasons.

  1. Retirement
  2. Resignation
  3. Unfortunate Death Or Disablement

The condition of 5 years of service is however not insisted in the event of the death or permanent disablement of the employee and the Gratuity commitment has to be honored.

The Gratuity payable to an Employee is calculated using the following formula.

GRATUITY =   Terminal Salary x No. of years of Service x 15 / 26

From the above formula it is obvious that Gratuity liability of an Employer increases with completion of every year of service and with the grant of every increment.

Over a period of time the Gratuity liability of the company shall accrue and becomes very high. Some organizations who have not planned their future commitment find it very difficult to meet the liability at one time.

The Group Gratuity Scheme of LIC helps the employers to plan their future Gratuity commitment right from the beginning.

Group Gratuity scheme is nothing but managing fund meant for Gratuity payment. The contribution made by the employers towards the Group Gratuity Scheme subject to maximum of 8 1/3% of the total annual salary is allowed as business expenses during the financial year under Section 36 (I)(V) of Income Tax Act.

The amount of gratuity received by an employee at the time his exit is also exempted from income tax up to Rs. 10,00,000/- under section 10(10)(III) of Income Tax Act

The Employer has to set up an irrevocable trust for operation of the scheme and make contribution to the trust every year. The payment made by the employer to the trust is eligible for deduction in profit computation. The trust in turn shall purchase Group Gratuity Scheme from LIC of India. LIC of India will provide all technical assistance and guidance in the formation of trust.

There is a provision to cover past service Gratuity liability also.

The initial contribution to cover the past service liability of the employer shall be made in one lump sum or in annual installments not exceeding 5 in number together with the annual contributions for the future Gratuity liabilities.

The initial and annual contribution made by the employer is accumulated as Gratuity fund and is managed by LIC of India as a running account in the name of the trust.

All Gratuity liability of the company will be met out of this Gratuity fund in full and will be paid back to the trust for disbursement as and when the need arises.

LIC is paying interest for the accrued fund every year at the rate ranging from 7.00% to 8.00% and a statement featuring all transaction is given to the trust every year. The interest earned by the fund is exempted from income tax under section 10(25)(IV) of income tax act.

Built In Insurance Cover:

Very important aspect of this scheme is the Built in Insurance cover. The built in insurance cover assures the employees and their family the full service gratuity in case of death of an employee during his service. This benefit will increase the morale of the employees and will enhance their loyalty towards the organization.

This can be illustrated with the following example.

An employee named X joins service at the age of 25 years.

Retirement age                                                           : 58 years

Assuming that the employee X dies in an accident or due to any other reason at the age of 30 years.                           

Left out service                                                           : 28 years.

Salary at the time of death                                       : Rs.10, 000/- month

Gratuity actually payable to the employee            :    10000 x 5 x 15 / 26 

                                                                                       Rs.28,846 /-

Under the Group Gratuity scheme 
with this built in insurance
cover LIC will pay        :10000 x 33 x 15 / 26

                                                                                       : Rs.1, 90, 385 /-

Though LIC makes a payment of Rs.1,90,385 to the trust, LIC will deduct only Rs.28,846/- from  the  running  account  of  the  gratuity  fund  managed  in  the  name  of the trust. Balance of Rs.1, 61, 539/- is met out of LIC’s risk insurance fund.

To meet this built in insurance cover LIC charges a small amount as risk premium which is collected from the employer along with the annual contribution. The employee’s family in his absence is benefited by this unique facility.

The following are the advantages for the employers:

  1.    The employer manages the fund through LIC with an attractive yield  and do not incur any expenses on fund management.
  2. Tax Concession (Contribution is treated as expenditure of the company   under Section 36(1)(V) of I.T Act.)
  3. Provision for better Gratuity facility through built-in insurance cover.
  4. Employer can prefer the claims as and when the amount is to be settled.
  5.  Every year LIC value the liability by actuarial valuation, and do not charge any fees for this valuation, and inform employer the contribution payable.
  6. As regards the employee leaving before 5 years, the money will remain in the fund and the same is automatically adjusted, in the next years’ valuation,  towards the contribution.

I am enclosing the details of the data required from your institution for preparing the quotation mentioning the premium payable to cover the past service Gratuity, the future Gratuity commitment and the risk premium.   

We also have other schemes like Group Insurance scheme, Group Superannuation scheme and Group Savings linked insurance scheme for the benefit of both the Employer and Employees.

I request you for an appointment to discuss about various Group Insurance products of LIC at any time of your choice.

Yours Sincerely,

(M.Karunanidhi B.Sc., FChFP)

Chartered Financial Practitioner

Mobile No. 98430 – 65776


Employees Group Gratuity Scheme – New Gratuity Plan

  1. LIC has introduced this New Gratuity Plan in order to comply with the Insurance Regulator’s New Guidelines for insurers
  2. To meet the requirements of New Joiners of Employees Gratuity Fund

Features of New Group Gratuity Cash Accumulation Plan (UIN 512N281V01)

  1. There are 3 different types of Interest Account in the new scheme viz. Minimum Floor Rate (MFR), Additional Interest Rate (AIR) and Residual Addition
  • MFR – is fixed at 0.5% p.a. – Not policy specific
  • AIR – is declared in advance for each quarter, the corporation shall also declared non zero positive Additional Interest Rate (AIR) on the policy account at the beginning of each financial quarter starting from 1st April, July, October and January every year.
  • This AIR is guaranteed for that financial quarter.
  • For the financial quarter during which this plan is launched i.e. for the period from 23rd October 2013 to 31st December 2013, the AIR shall be 8.9% per annum effective
  • Residual Addition (RA) – Policy specific, declared at each of the policy year after fice policy year duration
  1. Life Cover Sum Assured (LCSA) – existing process will continue
  • Premium (Mortality Charges) of life cover – existing practice of giving quote on Annual Renewal Date (ARD) will continue. However under New Plan, now premium will be payable on monthly basis for the members covered. Premium will be realized from Running Account (policy account)
  1. Apart from Life Cover premium (Mortality Charges) and service tax there on, policy administarion charges (PAC) will be recovered from the running account (policy account). The PAC is fixed @ 15 paisa per thousand sum assured per annum. Recovery will be made along with premium on monthly basis
  2. As per IRDA new guidelines, the Rate of Risk premium is brought down drastically.
  3. Fund Management Charge (FMC) – Depends on size of the fund and is calculated on slab basis

Size of policy Account Value of the scheme


 Fund Management Charge (FMC) p.a

Initial amount up to Rs. 1 Crore



On subsequent amount above 1 Crore and less than or equal to 5 Crores



On subsequent amount above 5 Crores but less than or equal to 25 Crores




Market Value Adjustment (MVA) – Bulk exit and Wholesale surrender will attract this charge. The rate / amount will be given by Corporate office

Treatment of policies under existing Group Gratuity Cash Accumulation Scheme

All policies under existing Group gratuity Cash Accumulation scheme at the time of renewal shall be given an option to switch over to LIC’s New Group Gratuity Cash Accumulation Plan. Those group policies which do not switch over to the new plan will be given the following options.

  1. May continue to be renewed under the old policy
  2. Shall be closed to new members
  • Specific written consent is required to continue in the old policy as detailed in the enclosed letter.