Gratuity Fund: Establishment, NBR Approval & Tax Benefits

- Prepared by ACE Advisory

1. Understanding Gratuity

What Is Gratuity?

Gratuity is a mandatory financial benefit that employers pay to employees upon separation from service- whether through retirement, resignation, incapacitation, or death.

Under the Bangladesh Labor Act, 2006, gratuity is calculated based on:

Length of service
Last drawn wages (basic salary)

Key point: Gratuity is a legal entitlement, not a discretionary payment. Employees who meet qualifying conditions have a right to receive it.

Why Establish a Gratuity Fund?

While the Labor Act requires gratuity payment, it does not mandate advance fund creation. Many companies pay gratuity directly from operating cash when obligations arise.

However, this approach carries financial risk- especially for larger organizations with significant workforces.

A Gratuity Fund is a separately managed, trust-held pool established in advance to cover future gratuity payments. It operates independently from company finances under its own legal structure.

Tax Advantage: Companies that establish a formal Gratuity Fund and obtain NBR approval gain significant tax benefits unavailable when gratuity is paid directly from company funds.

2. Step-by-Step Process

Phase I: Establishing the Fund

Step 1- Board Resolution

The company must pass a formal board resolution to establish the fund as an irrevocable trust.

Irrevocable means: Once created, the employer cannot dissolve the trust, reclaim contributions, or reverse the arrangement unilaterally. This protects employee entitlements.

Step 2- Appoint Trustees

A Board of Trustees must be appointed to oversee the fund. Trustees:

Act independently of the employer
Have fiduciary duty to employees (beneficiaries), not the company
Ensure the fund operates per the trust deed, rules and applicable law

Step 3- Draft Legal Documents

Two foundational documents are required:

Document	Purpose
Trust Deed	Primary legal instrument creating the trust; records the objectives and purposes of the fund, trustee identities, and governing terms
Fund Rules	Operational guidelines

Fund Rules must address:

Objectives and scope of the fund
Eligible employee categories
Gratuity calculation formula and payment conditions
Employer contribution obligations
Investment policy (where and how funds may be invested)
Procedures for processing gratuity payments
Administrative arrangements, reporting, auditing and dispute resolution

Step 4- Execute and Operationalize

Execute the Trust Deed: Signed by authorized company representatives and trustees
Open a dedicated bank account in the fund's name
All contributions and investment proceeds flow through this account, kept entirely separate from company finances

Phase II: Obtaining NBR Approval

Who Applies?

A trustee of the fund (not the employer directly) submits the application to the Commissioner of Taxes in the employer's tax jurisdiction.

Required Documents:

Copy of employer’s Board Resolution approving the establishment of a Gratuity Fund
Copy of resolution of the Board of trustees of the Gratuity Fund to obtain approval from the respective tax authority
Notarized copies of the Trust Deed and Rules
Audited financial statements for the immediately preceding financial year (if the fund exists from prior period)
Statement of the bank account for the latest financial year (if separate bank account is maintained)
Where applicable, certificate of incorporation, MOA, AOA, E-TIN, BIN, trade license, latest proof of submission of tax return of the employer
List of existing beneficiaries of the fund with designations, dates of joining with the employer, NID numbers
Any other documents required by the tax authority under the Income Tax Act, 2023

Review Timeline

The Commissioner of Taxes must issue a written decision within 180 days
Auto-approval safeguard: If no decision is issued within 180 days, the fund is automatically treated as approved

Approval Order Contents:

Terms and conditions of approval
Effective date of approval
Duration of approval (if for fixed term, not less than 10 years)

Renewal requirement: For fixed-term approvals, trustees must apply for renewal before expiry. Late renewal risks loss of approval status and tax advantages.

Phase III: Ongoing Compliance

Obligation	Requirement
Adherence to Trust Deed & Rules	All operations must strictly conform; any deviation may jeopardize approval status
Financial Separation	Fund finances must remain distinct from company accounts; only formal contributions and approved disbursements permitted
Annual Audit	Mandatory audit by a qualified auditor each year
Tax Reporting	If the Deputy Commissioner of Taxes requires by a notice, the Trustees of the fund or the employer must furnish such return, statement or information as specified in the notice
Notify Changes	Any amendments to Trust Deed or Rules must be reported to and approved by the respective tax authority

3. Tax Benefits of NBR-Approved Gratuity Funds

Benefit Category	Description
Fund Income	Exempt from tax except income from financial assets (which will be subject to TDS only)
Employer Contributions	Deductible as a business expense (within prescribed limits)
Employee Receipts	Exempt up to Tk. 25 million

4. Quick Reference Table

Item	Requirement / Detail
Fund structure	Irrevocable trust- cannot be dissolved by employer
Who applies for NBR Approval?	A trustee (not the employer)
Where to file?	Commissioner of Taxes (employer's tax jurisdiction)
Required documents	Trust deed & rules, Board’s approval, bank statements, prior audited accounts and other relevant documents
NBR decision timeline	180 days (auto-approved if no decision)
Minimum employee coverage	At least 90% of all employees in Bangladesh
Sole purpose	Gratuity payments only (retirement, incapacity, death or separation)
Contributor	Employer only- employees do not contribute
Benefit payment location	Bangladesh only
Annual audit	Mandatory by qualified auditor
Fund finances	Fully separate from company accounts

Disclaimer
This document is prepared by ACE Advisory for general reference only. It provides a simplified overview of the legal and tax framework and should not be relied upon as formal legal or tax advice. Consult ACE Advisory or a qualified professional before taking any specific action.