Query

Dear sir,

I work in the Human Recourse Department of a reputed multinational company. I am not very informed about the gratuity scheme and associated income tax benefits, as I hear different opinions from within my peer group. We would appreciate if you can enlighten us on the matter.

Jafrul Islam, Dhaka.

Response

Thank you for your query. Gratuity is a discretionary monetary benefit scheme offered by an employer upon completion of service of an employee. For every type of separation, the employee becomes entitled to an amount as either 'compensation' or 'gratuity' (if any), whichever is higher as stated in the relevant provisions under the Bangladesh Labour Act, 2006 (hereinafter referred to as BLA). In case, if an organisation does not have any gratuity scheme, then the employer is liable to pay compensation, as per the BLA at the time of separation. Gratuity or compensation payment shall be in addition to any payment of wage/salary in lieu of notice due to separation of service of an employee on different grounds.

An employee will be entitled to gratuity only when he has been in uninterrupted service for more than 01 (one) year with the organisation. The definition of gratuity stated in Section 2 (10) of the BLA indicates that more than 06 (six) months is considered as a full year. It is worth noting that completion of more than 06 (six) months of service will be deemed as 01 (one) year from the second year.

The amount of gratuity depends upon the duration of service. The amount of gratuity increases with the length of the service of an employee.  Gratuity is calculated at the mentioned rate as per Section 2 (10) of BLA on the basis of the employees latest basic wages received for every completed year of service. Withholding of gratuity payment is permissible only in case of dismissal of an employee for misconduct under Section 23(4) (b) & Section 23(4) (g) of BLA and not otherwise.

Gratuity amount taxable or not

By adopting a gratuity scheme within an organisation, an organisation can claim tax rebate against the gratuity fund as well as the employee need not pay income tax on the amount either. It may be also mentioned that as per the Income Tax Ordinance 1984 (hereinafter referred to as ITO), gratuity amount up to BDT 2,50,00,000.00 (Taka Two Crore & Fifty Lac) only is not taxable.

However, to avail such income tax benefit, as per Section 2 (5A) of the ITO, the gratuity scheme needs to be recognised by the National Board of Revenue (NBR) in accordance with the provisions of Part C of the First Schedule of ITO. For such recognition, the organisation needs to create a separate gratuity fund, manage the fund by a board of trustees. In order to do so firstly the organisation has to form a trust and an application is to be made in writing by the trustees to the NBR through a prescribed procedure, along with the copy of the instrument (i.e Trust deed and rules) and other necessary documents as specified in the schedule. The Board, subject to fulfilling the conditions, approves the gratuity fund within 3 (three) months of the receipt of such application. The auditor shall have to audit the fund account annually as per rules of the fund. The fund will be treated completely separate from the fund of the organisation. Hence, as per the provisions of the Schedule, income derived from investments or deposits of an approved gratuity fund and any capital gains arising from the transfer of capital assets of such fund shall be exempted from payment of income tax.

I hope that the above shall help to you to understand the gratuity scheme.