from Gratuity48 to Gratuity74: Ep02

Posted by Parajuli Sushil 3 years Ago 1 Comment 13 Min Read

In our previous post: from Gratuity48 to Gratuity74: Ep01 we discussed the nature of the Gratuity Expenses under Labor Act 2048 and Labor Act 2074, the difference between the Defined Benefit Plan and Defined Contribution Plan and the issues relating to the recognition of the gratuity expenses for the tax purposes. 

In examples below we have assumed a person whose service period began from 2030.01.01 with a salary of 24,000 NPR and every year his salary increased by 2,000 NPR. 

The salary amount are as follows:
BS 2032 : NPR 24000 | BS 2033 : NPR 26000 | BS 2034 : NPR 28000 | BS 2035 : NPR 30000 | BS 2036 : NPR 32000 | BS 2037 : NPR 34000 | BS 2038 : NPR 36000 | BS 2039 : NPR 38000 | BS 2040 : NPR 40000 | BS 2041 : NPR 42000 | BS 2042 : NPR 44000 | BS 2043 : NPR 46000 | BS 2044 : NPR 48000 | BS 2045 : NPR 50000 | BS 2046 : NPR 52000 | BS 2047 : NPR 54000 | BS 2048 : NPR 56000 | BS 2049 : NPR 58000 | BS 2050 : NPR 60000 | BS 2051 : NPR 62000 | BS 2052 : NPR 64000 | BS 2053 : NPR 66000 | BS 2054 : NPR 68000 | BS 2055 : NPR 70000 | BS 2056 : NPR 72000 | BS 2057 : NPR 74000 | BS 2058 : NPR 76000 | BS 2059 : NPR 78000 | BS 2060 : NPR 80000 | BS 2061 : NPR 82000 | BS 2062 : NPR 84000 | BS 2063 : NPR 86000 | BS 2064 : NPR 88000 | BS 2065 : NPR 90000 | BS 2066 : NPR 92000 | BS 2067 : NPR 94000 | BS 2068 : NPR 96000 | BS 2069 : NPR 98000 | BS 2070 : NPR 100000 | BS 2071 : NPR 102000 | BS 2072 : NPR 104000 | BS 2073 : NPR 106000 | BS 2074 : NPR 108000 | BS 2075 : NPR 110000 | BS 2076 : NPR 112000 | BS 2077 : NPR 114000

A laborer joined service in 2032.01.01 and left the service in 2047.12.30

For the period 2030.01.01 to 2052.02.01 (until the enactment of Labor Act, 2048): The Factory and Factory Workers Act, 2016 didn’t provide any gratuity benefits, thus the employee leaving the service in 2047.12.30 is not entitled to any gratuity benefits. 

However, if the employer has provided some form of the gratuity benefits it would still not be taxable under the Income Tax Act 2031. Income Tax Act, 2031 specifically excluded medical allowance, daily or travelling allowance, remote area allowance, pocket allowance or leader allowance received by delegates on a foreign tour, casual expenses, Dashain expenses, any amount received in the form of reimbursement, telephone facility granted by the employer institution and also the gratuity and pension, consolidated home leave, sick leave, decoration, medal awarded by His Majesty’s Government, Government corporation, institution devoted to the public utilities and other institution as prescribed; from inclusion in the employment income. These income were also not subjected to application of any withholding income so were not subjected to income tax. The Tax Rates were defined by Annual Finance Acts rather than in Act. 

A laborer joined service in 2032.01.01 and left the service in 2057.12.31

The statutory gratuity calculation would be as follows: 

  1. For the period 2030.01.01 to 2052.02.01 under The Factory and Factory Workers Act, 2016: 0
  2. For the period 2052.02.02 to 2057.12.31 under Labor Act, 2048
    • For the first 5.91 years: 2052.02.02 to 2057.12.30: 5.91×74,000×(1/2)=218,670

However, the gratuity benefits would still not be taxable under the Income Tax Act 2031. Income Tax Act, 2032 specifically excluded medical allowance, daily or travelling allowance, remote area allowance, pocket allowance or leader allowance received by delegates on a foreign tour, casual expenses, Dashain expenses, any amount received in the form of reimbursement, telephone facility granted by the employer institution and also the gratuity and pension, consolidated home leave, sick leave, decoration, medal awarded by His Majesty’s Government, Government corporation, institution devoted to the public utilities and other institution as prescribed; from inclusion in the employment income. These income were also not subjected to application of any withholding income so were not subjected to income tax. The Tax Rates were defined by Annual Finance Acts rather than in Act. 

A laborer joined service in 2032.01.01 and left the service in 2064.12.30

The statutory gratuity calculation would be as follows: 

  1. For the period 2032.01.01 to 2052.02.01 under The Factory and Factory Workers Act, 2016: 0
  2. For the period 2052.02.02 to 2064.12.31 under Labor Act, 2048
    • For the first 6.88 years: 2052.02.02 to 2058.12.18: 6.88×88,000×(1/2)= 302,720 
    • For the next 0.12 years: 2058.12.19 to 2059.02.01: 0.12×88,000×(1/2)= 5,280
    • For the next 6.03 years: 2059.02.02 to 2064.12.30: 6.03×88,000×(2/3)= 353,760 

Rule 20(6) of the Income Tax Rules, 2059 exempts the amounts contributed to a provident fund or a citizen investment trust, of employees or workers, including interest earned by the amount, in the income years prior to the commencement of the Act (2058/12/18) and the amount for gratuity or accumulated leave. So the gratuity income accrued for the period first 6.88 years is exempt from tax. Secondly, the amount the derived for the next 0.12 years and the other 6.03 years shall be subject to taxation under Income Tax Act. 

A laborer joined service in 2032.01.01 and left the service in 2077.12.31

With the enactment of the Labor Act, 2074 the contribution towards gratuity changed into a defined contribution plan unlike the defined benefit plan under Labor Act, 2048. 

An important and a frequently asked question is: Whether the Gratuity Plan can be managed locally under the Labor Laws of Nepal?
Answer: Rule 24 of the Labor Rules 2050 had required an enterprise to establish a separate Fund for the purpose of depositing gratuity amount to be received by worker or employee, that is calculated under Rule 23. Since the gratuity plan under the Labor Act 2048 is a defined benefit plan, and since the prevailing Labor laws and regulations had also not prohibited to locally manage the gratuity plan, this was permissible under Labor Act, 2048. 
However, once the Labor Act 2075 was introduced the employer was required to deduct an amount equivalent to 8.33% of the basic remuneration of each labour each month and deposit it for the purpose of gratuity in the Social Security Fund in the name of the concerned labour. However, as per Section 53(6) of the Labor Act, 2074 if for any reason the amount of gratuity cannot be deposited in the approved retirement fund, the amount shall be paid out to the employee.  

Furthermore, as per Section 19 Directive on Operation of Social Security Schemes 2075, the employee enrolled in SSF has three options: 

  1. Transfer the amount in such fund to SSF as per the procedure prescribed by SSF in coordination with employer or retirement plan. 
    (Transition to SSF can be done in 4 installments over the period of 2 years from the date of enlistment in SSF as well  as per Rule 22 and Rule 23 of Labor Rules 2075)
  2. Receive the the amount due to them towards gratuity.
  3. Transfer/continue such amount in retirement funds established under the prevailing law.
    (Managing provident fund and gratuity locally by the employer is not allowed)  
Most beneficial option to the employer: Option 1 and Option 2 will create an equal amount of liability. So either plan may be chosen as per the collective agreement with the employees.
However, Option 3 might be more burdensome financially in long term if the employees consists mostly of those who were engaged prior to enforcement of Labor Act 2074. This is because as per Rule 23(3) of Labor Rules 2075, for employees engaged in employment prior to the enforcement of Labor Act 2074, the gratuity amount has to be continually recalculated based on the remuneration existing at the date of calculation of gratuity liability. This has further been supported by the case of Hulas Metal Crafts Vs Dallu Shah. 

SSF enrollment and contribution began in 2076.01.01

The statutory gratuity calculation would be as follows: 

  1. For the period 2032.01.01 to 2052.02.01 under The Factory and Factory Workers Act, 2016: 0
  2. For the period 2052.02.02 to 2064.12.31 under Labor Act, 2048
    • For the first 6.88 years: 2052.02.02 to 2058.12.18: 6.88×114,000×(1/2)=392,160
    • For the next 0.12 years: 2058.12.19 to 2059.02.01: 0.12×114,000×(1/2)=6,840
    • For the next 8 years: 2059.02.02 to 2067.02.01: 8×114,000×(2/3)=608,000
    • For the next 7.22 years: 2067.02.02 to 2074.05.18: 7.22×114,000=823,080 
  3. For the period 2074.05.19 to 2075.12.30 under Labor Act, 2074
    • (7.42×108,000+12×110,000)×8.33%=176,703
  4. For the period 2076.01.01 to 2077.12.31 under Labor Act, 2074 and Social Security Fund Act, 2074
    • To be received as per the retirement scheme plan of the SSF

Rule 20(6) of the Income Tax Rules, 2059 exempts the amounts contributed to a provident fund or a citizen investment trust, of employees or workers, including interest earned by the amount, in the income years prior to the commencement of the Act (2058/12/18) and the amount for gratuity or accumulated leave. So the gratuity income accrued for the period first 6.88 years is exempt from tax. Secondly, the amount the derived for the next 0.12 years and the other 8 years and 7.22 years shall be subject to taxation under Income Tax Act and so is the payment for the period 2074.05.19 to 2075.12.30 under Labor Act, 2074. 

SSF enrollment has not been made yet

The statutory gratuity calculation would be as follows: 

  1. For the period 2032.01.01 to 2052.02.01 under The Factory and Factory Workers Act, 2016: 0
  2. For the period 2052.02.02 to 2064.12.31 under Labor Act, 2048
    • For the first 6.88 years: 2052.02.02 to 2058.12.18: 6.88×114,000×(1/2)=392,160
    • For the next 0.12 years: 2058.12.19 to 2059.02.01: 0.12×114,000×(1/2)=6,840
    • For the next 8 years: 2059.02.02 to 2067.02.01: 8×114,000×(2/3)=608,000
    • For the next 7.22 years: 2067.02.02 to 2074.05.18: 7.22×114,000=823,080 
  3. For the period 2074.05.19 to 2077.12.31 under Labor Act, 2074
    • (7.42×108,000+12×110,000+12×112,000+12×114,000)×8.33%= 402,619

Rule 20(6) of the Income Tax Rules, 2059 exempts the amounts contributed to a provident fund or a citizen investment trust, of employees or workers, including interest earned by the amount, in the income years prior to the commencement of the Act (2058/12/18) and the amount for gratuity or accumulated leave. So the gratuity income accrued for the period first 6.88 years is exempt from tax. Secondly, the amount the derived for the next 0.12 years and the other 8 years and 7.22 years shall be subject to taxation under Income Tax Act and so is the payment for the period 2074.05.19 to 2077.12.31 under Labor Act, 2074.