Focus on saving for retirement has increased in the recent years.
Factors like increasing lifespan, decrease in joint family system and the economic inflation have contributed to increased awareness of the need to save for retirement. Apart from those employed with the central or state government, a vast majority of Indians do not receive a guaranteed pension after their retirement. The government has instituted some statutory plans as a social security measure for those employed in industries and establishments in the public and organized private sectors.
The Employees' Provident Fund Organization (EPFO) administers the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 for these organizations. This act covers a large number of industries and organizations which have more than 20 employees on its role. Both the employer and the employee contribute to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month. Voluntary higher contributions are also acceptable at the joint request of the member (employee) and the employer. The rate of interest is fixed by the central government in consultation with the central board of trustees of the Employees' Provident Fund every year during March/ April.
The fund is available to the employee at retirement or to his heirs at death. The employee can also withdraw from the fund for certain predefined events in his life such as buying a house or marriage of daughter, etc. EPF enjoys tax benefits with contributions, earnings and accumulation of all subscribers to the EPF being tax-free. The employer also gets a tax benefit to the extent of his contribution.
Apart from EPF, the Payment of Gratuity Act is another statutory retirement savings scheme put in place by the government. It is administered by the central government in establishments under its control, establishments having branches in more than one state, major ports, mines, oil fields and the railways. The state governments and union territory administrations are responsible for administering the Gratuity Act in all other cases. While the Employees' Provident Fund Scheme, 1952 is administered through the government, the payment of gratuity can be operated through life insurance companies as well. According to Income Tax Act, 1961, the employers as trustees of a gratuity fund can either manage the funds themselves with or without the help of the private fund managers or entrust the investment to a life insurance company by entering into a group gratuity scheme.
The Payment of Gratuity Act, 1972 applies to factories, mines, oil fields, plantations, ports, railways, motor transport undertakings, companies, shops and other establishments employing 10 persons or more. On completion of five years of service, employees are entitled to the payment of gratuity computed at 15 days wages for every completed year of service, subject to the maximum of Rs. 3,50,000. In the case of seasonal establishments, gratuity is payable at the rate of seven days' wages for each season. The gratuity is paid on retirement, resignation, disability or death.
The Income Tax Act exempts gratuity from income tax for all government employees. For non-government employees the exemption is limited to the amount of statutory benefit which is approximately halfmonth's salary for every completed year of service up to a maximum of Rs. 3,50,000. For the employer, any sum paid by way of contribution towards an approved gratuity fund created for the exclusive benefit of his employees (maximum contribution of 8.33% of employees salary) under an irrevocable trust, is allowed as deductible business expense.
Interest income on the fund is also tax-free. Gratuity payment is a statutory liability for an organization, and it tends to increase as salaries and tenure of employees increase. Gratuity payout can work to a substantial amount in case of large growing organizations and, therefore, paying gratuity from its current revenue can be difficult for the employer. Insurance companies offer gratuity products that help the forward funding of gratuity liabilities.
The gratuity product offered by the life insurance companies supports organizations in the establishment, plan and design of an approved gratuity trust fund. They also provide actuarial, administrative and investment management along with some additional options such as group life insurance.
The amount of gratuity payable to employees is the same as provided for in the rules of the gratuity trust fund. The extra benefit, which the insurance company provides to the members of the fund, is the term insurance cover equivalent to the future gratuity amount on the normal retirement date based on the current salary.
In case of the death of an employee before his retirement, the accrued gratuity is paid out from the trust fund with the insurer, and the future service gratuity is also paid as a death benefit. All other services including annual actuarial valuation of the gratuity liability and administration of the fund and the scheme are free of cost. The interest earned by the insurer is given to the fund at the end of each year. The interest varies according to the size of the fund. The adoption of the scheme saves considerable labour and cost otherwise to be incurred by the trustees or the employer on administration, investment and actuarial valuation of the gratuity trust fund.
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