Approved Gratuity/ Superannuation Fund: Section 2(5)/ 2(6) of Income Tax

Approved gratuity and superannuation funds are retirement schemes set up by employers in India. These funds help employees receive financial support when they retire, resign, or in case of death. They also offer tax benefits under the Income Tax Act, 1961 and help employers meet legal requirements like those in the Payment of Gratuity Act, 1972.

Employers create these funds through irrevocable trusts. This allows them to claim tax deductions on contributions. Employees also enjoy tax exemptions on withdrawals, if certain conditions are met. Below is a simplified guide to how these funds work, based on the latest rules.

Approved Gratuity Fund u/s 2(5)

As per S. 2(5) of the Income Tax Act, 1961, unless the context otherwise requires, the term “approved gratuity fund”, means a gratuity fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part C of the Fourth Schedule.

An approved gratuity fund is one that has received and continues to hold approval from the Income Tax Department. This includes officials like the Principal Chief Commissioner or Commissioner of Income Tax. The fund must follow the rules in Part C of the Fourth Schedule of the Income Tax Act.

Employers set up these funds only for the benefit of their employees. To get approval, they must apply using Rule 109 of the Income Tax Rules, 1962. The application should include details about the fund’s structure, trustees, and investment plans. The fund must be set up as an irrevocable trust and follow certain rules to keep its approved status. This includes regular reporting and following investment guidelines.

Tax Benefits:

• Employers can deduct contributions to the fund as a business expense under Section 36(1)(v).
• Contributions are based on actuarial valuations to match future liabilities.
• Income earned by the fund is tax-free under Section 10(25)(iv).
• Employees can receive up to ₹20 lakh as tax-free gratuity under Section 10(10), if the payment comes from an approved fund and meets other conditions.

This setup encourages employers to plan for gratuity payments properly and gives tax relief to both employers and employees.

Approved Superannuation Fund u/s 2(6)

As per S. 2(6) of the Income Tax Act, 1961, unless the context otherwise requires, the term “approved superannuation fund” means a superannuation fund or any part of a superannuation fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part B of the Fourth Schedule.

An approved superannuation fund is a retirement fund that has received and maintained approval from the Income Tax Department. It must follow the rules in Part B of the Fourth Schedule and be created for employee retirement benefits.

Employers must apply under Rules 87 to 97 of the Income Tax Rules, 1962. The application should include the fund’s terms, trustee details, and how contributions will be made. Like gratuity funds, superannuation funds must be irrevocable trusts and follow investment rules to stay approved.

Tax Benefits:

• Employees can claim deductions under Section 80C for their contributions, up to ₹1.5 lakh per year.
• Employers can deduct their contributions under Section 36(1)(iv). There is no limit for employers, but if they contribute more than ₹1.5 lakh per employee per year, the extra amount is taxable for the employee under Section 17(2)(vii).
• Income earned by the fund is exempt under Section 10(25)(iii).
• Withdrawals made by employees or their nominees during retirement or after death are tax-free under Section 10(13), if the fund is approved and other conditions are met.

Comparative Insights and Compliance Considerations

Both funds aim to support employees after retirement, but they work differently.

• Gratuity funds provide a lump-sum payment based on how long the employee worked and their salary. These are usually required for companies with 10 or more employees.
• Superannuation funds work more like pension schemes. They allow flexible contributions and can grow into larger retirement savings over time.

Employers often use these funds along with provident funds to get the best tax benefits.

Key Compliance Tips:

• Use actuarial valuations to decide gratuity contributions.
• Keep track of the ₹1.5 lakh limit for superannuation contributions to avoid extra tax.
• Conduct regular audits and follow all Income Tax Rules to keep the fund’s approval.

In short, approved gratuity and superannuation funds help employers support their staff while also saving on taxes. They offer a structured way to meet legal obligations and plan for long-term employee welfare.

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