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

Approved Gratuity Fund and Approved Superannuation Fund are prominent retirement savings options, which are commonly used by Employers and Employees of most of the Organizations, to take advantage of the deduction/ exemption available under the Income Tax Act, 1961 and to comply with the labor laws.

Section 2(5) Income Tax: Meaning of Approved Gratuity Fund

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.

However, to get approval for gratuity fund, an application is required to be submitted as per formats/ procedure prescribed under Income Rule 109.

It may be noted that Section 36(1)(v) provides for deduction against business income for ‘any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust’. Also that any income of an approved gratuity fund is exempt under Section 10(25)(iv) of the Income Tax Act, 1961.

Contributions by Employer in the gratuity fund are generally based on Actuarial Valuation.

Section 2(6) of Income Tax: Meaning of Approved Superannuation Fund

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.

Deduction for contributions within 80C cap limit and exemption on retirement withdrawals are the main tax benefits from approved superannuation funds.

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