Life Insurance Corporation of India offers its Group Gratuity Cash Accumulation scheme to enable employers to meet their gratuity liability in a very simple and efficient manner. The scheme is formulated in compliance with Part C of the IV schedule of Income Tax Act and tax benefits are available as provided in Income Tax rules
The gratuity arrangement with LIC provides the following services to the company
- Fund management under interest accumulation system
- Claim settlement on exit as per company rules/gratuity act
- Built in Insurance arrangement for the employees for future service
- MIS related to Income Tax and trusts accounts and Actuarial valuation
Fund management: Critical issues
Liability on account of gratuity experiences sharp increase every year due to its nature of its computation. Apart from increase in service, increase in salary also contributes to increase in liability substantially as the benefits are payable on last drawn salary. Hence funds have to be invested in a conservative way with a consistent growth and insulated from market risks
The unique advantage with LIC is the contributions made by the company and interests credited by LIC are irreversible. This ensures highest level of safety for the total corpus and consistency in future contributions. As the gratuity payments are statutory and LIC gratuity scheme being the only investment tool which enjoys sovereign guarantee, gives a greater comfort to employer.
Liquidity: Funds available with LIC is a single account for investment and claim settlement. Hence 100% liquidity is ensured for the purpose of claim settlement
Yield: LIC has been offering very competitive and consistent interest rates over the years. For the year 2009-10, LIC has offered 9.00% - 9.65% depending on fund size. The interest declared is net of administrative expenses incurred, hence no separate charges are charged after crediting the interest.
Interest rate offered by LIC is on daily balancing method. Hence, there is no idle time for earning interest, hence effective rate of interest is much higher. Another significant aspect is interest gets compounded annually, hence no reinvestment issues and no time lags.
No responsibility on trustees on Investment decisions: Trustees are free from all investment risks and hassles in cash accumulation system. Advantage of ‘real outsourcing’ can be derived by associating with LIC
No hidden charges: The scheme is focused on a long term association in compliance with investment regulations and statutory payment obligations and no charges are levied on the transactions for which the fund is meant for.
Funding can also be in a staggered pattern during the year, but no charges at entry level for any number of payments. No charges on withdrawals for resignation or retirement or death. Total corpus comprising of money contributed by the company and interest credited by LIC is available for claim settlement up to 100% subject to availability of funds.
Actuarial recommendations: On annual basis, LIC provides this information to the trustees and recommends the level of contributions.
Claim settlement: On the exit of an employee due to retirement / death/ resignation, trust may prefer a claim from LIC by sending a claim form. Claim amount will be made available to trustees. Trustees can have the following options
- Preferring a claim from LIC and paying to employee
- Paying the money to employees and seek reimbursement
- Paying claims to employees at their end and seeking annual reimbursement
MIS: LIC provides statement of receipts and payments and actuarial valuation certificate and certificate of balance for the trust account.
Besides the above said advantages, the scheme also provides for employee welfare measures with built in insurance cover.
- Insurance cover for future service gratuity
Another salient feature of the Gratuity Scheme with LIC is that it provides for insurance coverage to the employees to the tune of future service gratuity subject to certain limits. The insurance cover can be flexible depending on the requirements of the Trust. The Group Insurance premium will be commensurate to the cover provided.
- Income Tax Benefit on Insurance Premium
The insurance premium paid towards the above said benefits is treated as deductible business expenses to the company.
The premium is not treated as perks in the hands of the employees