Methodologies of Parking / Funding the Liability of Leave Encashment of Employees of Company

By | January 14, 2015
METHODOLOGIES OF PARKING/ FUNDING THE LIABILITY
OF LEAVE ENCASEMENT OF EMPLOYEES OF COMPANY

{Objective: To separate liability due to employees so that dues of employees
are secured.}

PAYGO – PAY FROM CURRENT REVENUE AS & WHEN FALL DUE:
– Every year, Company creates provision based on actuarial valuation
determined by actuary. Such provision is not allowed as business
expenses (i.e. added back to profit while computing tax liability) ;
– If the money to be set aside remains with Company, it pays Corporate
Tax on Interest Income.

INSURER MANAGED FUND– TAKING POLICY WITH INSURANCE
COMPANY:
– Premium paid to Insurance Company under Group Leave Encasement
Scheme is deductible u/s 37(1) of Income Tax Act ;
– By setting apart the funds required for the scheme, the interest earned
on the funds will not be forming part of other income in Statement of
Profit & Loss of Company;
– However, Insurance Company while calculating the actuarial valuation
will take into consideration the interest earned on the fund available and
the balance amount only will be required by Company to be made good;
– There are interpretation issues on tax treatment of:
i. Business expenses since disbursal/ settlement happens to the
employees at a future point of time; and
ii. Contribution as Perquisite since premium is paid by employer for
the employees’ benefit.

FUNDED THROUGH IRREVOCABLE TRUST- FORMING
SUPERANNUATION EMPLOYEE WELFARE BENEFITS TRUST
– Contribution paid to the Trust Fund by an employer is treated as
business expenses and is tax deductible;
– The interest earnings on the investments of the Trust will be exempted
from tax and to this extent the Incremental provision to be made by the
company on account of Leave Encasement would be lower;
– However, there is an interpretation issue on exemption to approval of
Trust Fund that needs to be addressed since, in place of employees,
Company would contribute Trust fund wholly whereas one of the
conditions written in Income Tax {Rule 16C (2) read with Sec.10 (23AAA)}
is that “Contributions to the fund are to be made by the employees by
way of periodical subscription”. 

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