Determining whether to fund gratuity liabilities is a long-term tactical decision and a pack of issues need to be reasoned. In this article, we have enlisted some important ‘generic’ factors, which would be pertinent to most companies designing funding their gratuity schemes.
- Tax benefits
From an employer’s point of view, there are 3 types of tax benefits on gratuity scheme offer if it is funded:
Per year, an amount equal to 8.33% of basic remunerations can be repaid into as a gratuity fund or tax-deductible expense. Actuarial companies Pune and other state follow the same percentage.
Investment or interest rate is earned within the gratuity fund which is also tax-free.
A mindfully planned funding strategy can considerably reduce the tax bill of a company. Besides, tax benefits are not the only concern for settling whether to fund a gratuity scheme.
- Opportunity cost
For investing in gratuity scheme liabilities, companies need to find liquid cash within the business, and then only commit to a gratuity trust. Debatably, the most important contemplation would be the alternative ways that cash could be capitalized and the return of that cash would develop for long term scheme.
When forming such comparability, one thing that needs to be considered that the interest is earned within a gratuity fund is tax-free. Thus, an expected return of 10% annually is equal to 14% pa pre-tax return, after completing up for tax at 30%. Many Actuarial companies Bangalore offers the same scheme.
- Liquidity management
If debts are financed, companies will need to repay the gratuities to leaving employees as they leave. Hence, the amount companies would pay off could depend greatly from year to year, as the number of leaving employees will be uncertain. This would be a primary consideration for small or mid-size companies where the resignation of just a few senior employees, having high salary and service, could create a stress on their cash flow positions. On the other hand, if a scheme is strategically funded, the fund will create during the years when no major pay offs are paid and then used when large pay out are required to be paid.
- Cashflow stability
For companies without experience, the gratuity payments to employees should be few and low. Besides, gratuity pay offs raise nearly proportionally as employees age and work longer.
- Cost management
Once the gratuity debts are funded, a tactful investment strategy could be made to enhance the returns, ultimately reducing the cost of the company.
In the end, the decision to finance will depend on how significant the above factors are for the company, for meeting their overall objectives of your company. Typically, new companies often neglect this issue as there are other more stressing issues in concern. Despite that, even for small and new businesses, there is a lot to get from better liquidity and stability. Big companies will have a lot to obtain from the tax benefits on offer.