CBDT Clarifies accounts in Gratuity Fund fulfilling conditions in Rule 114F(5) of Income Tax Rules shall be Treated as Excluded Accounts

The Central Board of Direct Taxes (CBDT) issued the clarification in respect of Rule 114F(5) of Income Tax Rules, 1962. The board has covered the treatment of the gratuity fund, Treaty Qualified Retirement Fund and Non-public fund of the armed forces on 26th July 2023.

A gratuity fund is a non-reporting financial institution under sub-clause (c) of clause (5) of Rule 114F of the Rules, provided that it is also a financial institution under Rule 114F of the Rules.

As per Explanation J to clause (5) of Rule 114F of the Rules, gratuity fund means “a fund established under the Payment of Gratuity Act, 1972 (39 of 1972), to provide for the payment of a gratuity to certain types of employees of an Indian employer specified in the Payment of Gratuity Act, 1972”.

As per paragraph II (H) of Annex II of the FATCA-IGA, a gratuity fund qualifies as a Non-Reporting Indian Financial Institution and as an exempt beneficial owner for the purposes of section 1471 and 1472 of the U.S. Internal Revenue Code. However, gratuity funds are not explicitly mentioned as Non-Reporting Financial Institution under the CRS.

In view of this, the following is clarified for the purpose of reporting under the CRS in

respect of accounts other than U.S. reportable accounts:

1. Gratuity funds which are only managed by either individual(s) and/or entity(ies) that is not a financial institution, are not capable of being classified as a managed Investment Entity under sub-clause (c) (B) of the Explanation to clause (3) of Rule 114F of the Rules. Hence, such gratuity funds will qualify as a passive non-financial entity as per clause (D) (i) of Explanation to clause 6 of Rule 114F of the Rules.

2. Reference is invited to Paragraph 2.3.3 of the Guidance Note on FATCA and CRS, where it has been stated that an Entity is “managed by” another Entity if it has discretionary authority to manage the Entity’s assets (in whole or part), either directly or through another service provider. In cases where a gratuity fund is a managed investment entity under subclause (c) (B) of clause (3) of Rule 114F of the Rules, such gratuity fund will qualify as a Financial Institution and a Reporting Financial Institution for reporting purposes under the CRS.

3. Generally, accounts held in gratuity funds will be treated as excluded accounts if they qualify as retirement or pension accounts as per clause h(i) of Explanation to clause 1 of the Rule 114F, subject to satisfaction of all the conditions laid out in that clause including, inter alia, the monetary limits in respect of contributions to the said funds.

4. However, accounts held in gratuity funds may also involve withdrawals conditioned on meeting specific criteria in circumstances beyond death, disability or retirement (e.g., gratuity funds that permit withdrawals upon resignation after a certain period of continuous service). Such accounts can be treated as excluded accounts under clause h(ii) of Explanation to clause 1 of the Rule 114F subject to satisfaction of all the conditions laid out in that clause including, inter alia, annual monetary limits in respect to contributions to the said funds.

In view of the above, in the event that a gratuity fund is a reporting financial institution, relevant accounts held with such a gratuity fund fulfilling the conditions specified in clause (h)(i) or h(ii) of the Explanation to clause 1 of Rule 114F of the Rules, will be treated as excluded accounts.

The CBDT also clarified that a Treaty Qualified Retirement Fund shall not be treated as a non-reporting financial institution for the purposes of maintaining and reporting information in respect of any reportable account other than a U.S. reportable account defined in clause (11) of Rule 114F of the Rules.

Further, a non-public fund of the armed forces shall not be treated as a financial institution in case of any reportable account other than a U.S. reportable account defined under clause (11) of Rule 114F of the Rules.

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