Section 40A(7) - Provision for payment of Gratuity - Income Tax - Ready Reckoner - Income Tax

Section 40A(7) : Provision for Payment of Gratuity No deduction shall be allowed in respect of provision made by the assessee for payment of gratuity to his employees. Provision for gratuity fund for meeting liability of gratuity in future liability is deductible only if gratuity fund is an approved gratuity fund. in other words provision for unapproved gratuity fund for meeting future liability is not deductible. The following point should be noted - An employee retires during the current year. Gratuity is paid to him during the current year. It is deductible during the current year if no deduction was claimed earlier. An employee retires during the current year. Gratuity payable to him. A part of amount is paid during the current year and the balance will be paid in the next year. A provisions is made gratuity in the books of account of the current year for the making payment in the next year. The entire amount is deductible during the current year if no deduction was claimed earlier. In the case, deduction is available during the current year even if provision is made for gratuity fund, which is unapproved. Exceptions: Payment as contribution towards approved gratuity fund (Subject to Section 43B ). Provisions made for payment of gratuity actually becoming payable during the previous year (allowed on accrual basis). Note: If the Gratuity is unapproved, deduction for gratuity shall not be allowed even if the provision for gratuity is made as per Actuary. If a policy is taken from LIC for providing gratuity to employees then annual premium is allowed as deduction u/s 37(1) . Premium paid to LIC for securing an insurance against liabilities arising under the Payment of Gratuity Act, 1972 is covered by the parameters of section 40A(7)(a) and not deducible. Transfer of Gratuity amount due to the employee to the new company in case of termination of service Where on termination of services of the employee, the assessee-company transferred gratuity amount due to the employee to the new company under which he continued his employment, in these circumstances gratuity amount payable to the employee should be taken to have been 'paid' within meaning of section 43(2) , and therefore the assessee would be entitled to claim deduction of the said amount u/s 40A(7) .