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Establishing and Obtaining NBR Recognition for a Gratuity Fund in Bangladesh

Table of Contents

While the Bangladesh Labour Act, 2006, and the Labour Rules, 2015, detail the payment of gratuity to workers upon separation from service, they do not mandate a specific procedure for establishing a separate Gratuity Fund. Gratuity, as defined in the Labour Act, is primarily an end-of-service financial benefit.

However, companies in Bangladesh can opt to set up a formal Gratuity Fund, typically structured as an irrevocable trust. This approach helps manage the gratuity liability and can offer tax advantages if the fund is approved by the National Board of Revenue (NBR). The establishment and approval process primarily falls under the guidelines of the Income Tax Act, 2023 (previously the Income Tax Ordinance, 1984).

This guide outlines the steps for establishing a Gratuity Fund and then obtaining NBR recognition.

I. Establishing a Gratuity Fund
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The initial phase involves setting up the legal and operational framework for the fund.

A. Formation of an Irrevocable Trust
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The foundational step is to create a formal trust specifically for managing gratuity payments. Key characteristics include:

  • Irrevocability: The trust, once established, cannot be cancelled or undone by the employer.
  • Connection to Business: The trust must be established in connection with a trade or business carried out in Bangladesh.

B. Appointment of Trustees
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A Board of Trustees must be appointed. Their role is to manage the Gratuity Fund independently and in accordance with the trust deed and applicable laws.

C. Drafting the Trust Deed and Fund Rules
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Comprehensive legal documents are required:

  • Trust Deed: This is the legal instrument that formally establishes the trust.
  • Fund Rules: These rules govern the Gratuity Fund’s operation. They must clearly outline:
    • The objectives of the fund.
    • Conditions for employees to receive gratuity.
    • Details of contributions (primarily by the employer).
    • The fund’s investment policy.
    • Procedures for payouts and other administrative matters.

II. Obtaining NBR Recognition for the Gratuity Fund
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Once the fund is established, the next crucial step is to seek recognition from the National Board of Revenue (NBR) to avail of potential tax benefits.

A. Conditions for NBR Approval and Maintenance
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To be approved by the NBR and maintain that approval, a Gratuity Fund must satisfy several conditions, primarily outlined in the Income Tax Act, 2023:

  • Irrevocable Trust in Bangladesh: It must be established under an irrevocable trust related to a business or industrial establishment operating in Bangladesh. A significant majority (e.g., at least 90%) of its employees must be employed in Bangladesh.
  • Sole Purpose: The fund’s exclusive purpose must be to provide financial assistance (gratuity) to:
    • Employees who retire at or after a specified age.
    • Employees who become incapacitated before retirement.
    • The widow, children, or dependents of an employee in the event of the employee’s death.
  • Employer as Contributor: The employer associated with the business or industrial establishment must be the contributor to the fund.
  • Benefits Payable in Bangladesh: All benefits granted by the fund must be payable only in Bangladesh.
  • Other NBR Conditions: The fund must fulfill any other conditions that the NBR may prescribe.

B. Application Process for NBR Approval
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The process for obtaining NBR approval involves the following steps:

  1. Application by Trustee: A trustee of the fund must formally apply to the relevant Commissioner of Taxes for approval. This application should be made in the prescribed manner to the Commissioner under whose jurisdiction the employer’s tax assessment falls.
  2. Required Documentation: The application must typically be accompanied by:
    • A copy of the Trust Deed.
    • Two copies of the Fund’s rules.
    • If the fund existed before the application, two copies of the fund’s accounts for the preceding year(s) (up to three years may be required).
    • Other documents as specified by the NBR or relevant tax laws (e.g., Part C of the First Schedule of the Income Tax Ordinance, 1984, now relevant schedules/parts of the Income Tax Act, 2023).
  3. Notification of Changes: If any alterations are made to the fund’s rules, constitution, purpose, or conditions after submitting the application, the applicant must promptly inform the Commissioner.
  4. NBR Review and Scrutiny: The Commissioner will review the application, along with all relevant records and documents. They may request additional documents or information from the trustee. The Commissioner may also direct the applicant (trustee) to appear before them during the application review process.
  5. Decision Timeline: The Commissioner is generally required to provide a written decision on the application within 180 days of receiving it. If the Commissioner fails to make a decision within this timeframe, the fund is typically considered to be approved.
  6. Approval Order: If the application is approved, the NBR’s order will specify the terms and conditions of the approval, its effective date, and potentially the duration of the approval.
  7. Extension of Approval: If the NBR approval is granted for a specific duration, the trustee must apply for an extension before the current approval period expires.

III. Benefits of an NBR-Approved Gratuity Fund
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Securing NBR approval for a Gratuity Fund offers significant financial advantages:

  • Tax Exemption for Fund Income: Income earned from the fund’s investments and any capital gains realized by the fund may be exempt from income tax.
  • Deductibility of Employer Contributions: Contributions made by the employer to the approved Gratuity Fund may be considered a deductible business expense for tax purposes, subject to prescribed limits.
  • Tax Exemption for Employee Receipts: Gratuity amounts received by employees from an NBR-approved fund are generally tax-exempt up to a substantial limit (previously BDT 2.5 crore, subject to prevailing income tax laws).

IV. Ongoing Management and Compliance
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Once a Gratuity Fund is established and approved, diligent management and compliance are essential:

  • Adherence to Trust Deed and Rules: The fund must be managed strictly in accordance with the approved Trust Deed and Rules.
  • Separation of Finances: The fund’s finances must be kept entirely separate from the company’s own accounts.
  • Annual Audit: The fund’s accounts must be audited annually by a qualified auditor.
  • Reporting to Tax Authorities: Trustees are responsible for furnishing returns, statements, and any other information as required by the NBR or the Deputy Commissioner of Taxes.
  • Notification of Changes: Any subsequent amendments to the Trust Deed or Fund Rules must be communicated to the tax authorities for their records and, if necessary, approval.

Disclaimer: The legal framework, particularly tax laws, can undergo changes. The information provided here is for general guidance and is based on common practices and provisions analogous to the Income Tax Ordinance, 1984, which has been largely replaced by the Income Tax Act, 2023. For the most current and specific advice, consulting with a qualified legal and tax professional in Bangladesh is strongly recommended.

Key Contact

For assistance with establishing an NBR-approved Gratuity Fund or for advice on compliance and management in Bangladesh, please reach out to: