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Article | Global News Briefs

Bangladesh: Tax exemption eliminated for certain gratuity payments

Future of Work|Health and Benefits|Retirement

By Rahul De | August 31, 2020

Certain gratuity payments are taxable under the new Finance Act; employers should consider pre-funding gratuities via approved funds.

Employer Action Code: Act

The Finance Act 2020 restricts the prior tax exemption (under the Income Tax Ordinance 1984) on all employer-provided gratuity payments of up to 25 million Bangladeshi taka (Tk) (US$290,000) to only those payments made by the government or from a government-approved gratuity fund. The government’s intention is to encourage private employers to establish separately managed trusts for the funding of their gratuity payment liabilities. The Labor Act (2013) requires employers to provide a defined benefit lump sum gratuity payment at the end of an employee’s service, at 30 days’ pay per year of completed service up to 10 and 45 days’ pay per year of completed service beyond 10.

Key details

  • Effective July 1, 2020, the tax exemption on end-of-service gratuities up to Tk25 million (US$290,000) only applies to payments from gratuity funds that have been approved by the National Board of Revenue (NBR).
  • NBR approval requirements (under the Income Tax Ordinance 1984) generally include that the fund be set up as an irrevocable external trust and that investments consist of government bonds or other government securities, deposits in state banks or others specially approved by the NBR. The income from such investments is liable for income tax at a concessionary rate of 10%.

Employer implications

Many companies in Bangladesh do not pre-fund their gratuity liabilities. Of those that have pre-funded, many utilize self-managed funds not approved by the NBR. The tax-exemption change could result in a significant reduction to the gratuity amount retained by employees leaving service, including at retirement. Employers may wish to consider starting to pre-fund gratuities via approved funds if they’re currently not doing so. Contributions to an approved gratuity fund are deemed as an allowable expense for the company. However, it should be noted that further clarifications are expected from the government — for example, regarding whether the prior tax exemption would continue to apply in the case of unfunded book reserve (pay-as-you-go) arrangements or for an interim time frame to allow companies to set up an external trust. The NBR is likely to deliberate any concessions on a case-by-case basis, but it appears highly unlikely any will be granted.


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