On 10 January 2024, the Karnataka Government published the Karnataka Compulsory Gratuity Insurance Rules, 2024 (‘Rules’) (No: LD 397 LET 2023) to prescribe the requirement for employers to obtain a valid insurance policy for the employer’s liability towards payment of gratuity to eligible employees as per the Payment of Gratuity Act 1972 (‘Gratuity Act’). With this, Karnataka has become the second state to issue rules on compulsory gratuity insurance after the Andhra Pradesh Compulsory Gratuity Insurance Rules issued in 2011.
The Rules prescribe the following key aspects in relation to the requirement to obtain insurance:
1. Obtaining insurance – The insurance policy can be obtained from the Life Insurance Corporation (LIC) or any other insurance company incorporated under applicable law for insurance companies. Existing companies have been provided a timeline of sixty days to obtain such insurance policy (i.e., till 10 March 2024). New employers are required to obtain such insurance within a period of thirty days from the date on which the Rules become applicable to the establishment.
2. Registration – Employer is required to submit an application to get the establishment registered with the Controlling Authority in the prescribed format, within thirty days from the date of obtaining insurance. Further, whenever there is a change in the employees insured or policies or any other pertinent information, the employer is required to furnish the details to the Controlling Authority.
3. Payments and Intimation – Employer is required to exercise due diligence and ensure that the payment of premium to the insurance company is made on a timely basis (before lapse of the policy), renewal of the insurance is done periodically the same is intimated to the Controlling Authority within fifteen days from renewal.
4. Recovery of the amount of Gratuity –The Controlling Authority is authorised to recover the gratuity payable to an employee directly from the LIC or other insurance provider.
5. Incorporation/continuation of Approved Gratuity Fund – An employer who has already established an approved gratuity fund OR has more employed 500 or more persons may opt to continue / adopt such arrangement. Such employer is required to submit an application in a prescribed form and is required to ensure that the approved gratuity fund covers the entire liability of all the employees of the establishment.
6. Conditions for Gratuity Trust – The Rules also prescribe the following key aspects in relation to the Gratuity Trust for it to qualify as Approved Gratuity Fund (Rule 7 of the Rules):
- Employer to maintain the Gratuity Trust as an irrevocable trust.
- Gratuity Trust should have 5 but not equal number of representatives of the employer and employees
- Gratuity Trust should be registered with the authority notified under Indian Trusts Act, 1882 or any other applicable law and also ensure compliance with provisions of Income Tax Act, 1961 and any other applicable law.
- Gratuity Trust shall be managed privately OR by the insurance company OR jointly by paying the calculated amount to the approved Gratuity Trust fund periodically.
- Where employer has obtained a group gratuity scheme from an insurance company, the same should be approved under Part C of the Fourth Schedule to the Income-tax Act.
- For privately managed Gratuity Trust, investment of funds by the Gratuity Trust shall be in accordance with the Investment Pattern prescribed in the Income-tax Act.
- The gratuity funds are totally protected and the outflow shall be only to eligible employees at the time of their exit from service. Money shall not be withdrawn by employer or by the Gratuity Trust for any purpose other than the payment of gratuity to eligible employees.
- Bye-laws should have detailed procedures on claim and release of the calculated amount of gratuity to eligible employees.
- Gratuity Trust is required to adhere to Indian accounting standard on Employee Benefits.
- The Board of Trustees of the Gratuity Trust shall send discharge letter and advise insurance company or make arrangement of payment of gratuity as per the scheme at the time of exit of an employee.
- The Gratuity Trust and the insurance company are jointly and severally responsible for fulfilment of liabilities under the Act.
The introduction of the Karnataka Compulsory Gratuity Insurance Rules, 2024, by the Karnataka government is a landmark move aimed at reinforcing the financial security of employees regarding gratuity payments. By mandating that employers secure a valid insurance policy to cover their gratuity liabilities as stipulated under the Payment of Gratuity Act, 1972, the state is ensuring a more reliable and structured mechanism for the disbursement of gratuity benefits. This initiative is particularly significant in safeguarding employees’ rights to their end-of-service benefits, addressing concerns around the non-payment or delays that have historically plagued the gratuity system. The rules are poised to benefit both employees and employers. For employees, it means an added layer of assurance that their gratuity will be paid timely, enhancing their financial stability post-retirement or upon service termination. For employers, especially those operating small and medium-sized enterprises, this could alleviate the financial strain of lump-sum gratuity payments through risk sharing facilitated by insurance. However, the effectiveness of this policy will largely depend on its implementation, regulatory oversight, and the availability of affordable insurance products that do not unduly burden employers. Properly executed, these rules could significantly improve the labor market’s stability and fairness, ensuring that gratuity payments are secured through a financially prudent and reliable system -JSPCO
