Taxation of Approved Gratuity Trust Under Income Tax Act 1961

When it comes to taxation of approved gratuity fund, there is lot of confusion on topics such as tax slabs, income tax exemption. 

So all these questions can be tackled from following perspectives

Status of Approved Gratuity Fund

A Separate PAN number is required to file income tax return of approved gratuity fund. In the application, it has to be mentioned as trust which amounts to body of individuals under Income Tax Act.

To conclude in eyes of Income Tax, approved gratuity fund is Body of Individuals.

What will be the treatment of Income Earned under Income Tax Act 1961?

Section 10(25) (iv) of Income Tax Act says any income received on behalf of the approved gratuity fund is exempt from tax. But again there is some confusion whether income received by trustee is only exempt? Or income such as interest accrued on gratuity funds is also exempt?

In our opinion, any income earned by approved gratuity fund is exempt under Income Tax Act, as the gratuity fund is represented by trustees. The same thing is there in definition of representational assesse. Below is the extract of the definition of representational assesse

For the purposes of this Act, “representative assessee” means in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees

Point to be noted: Every representative assessee shall be deemed to be an assessee for the purposes of this Act

To conclude: Whether income is accrued in gratuity fund or received by trustee, such income is exempt from tax

How to File the Income Tax Return of Approved Gratuity Fund?

Even though income is exempt from tax, the details of such income have to be shown in relevant ITR and then exemption under section 10 should be claimed.