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COMPULSORY GRATUITY INSURANCE RULES

FREQUENTLY ASKED QUESTIONS

Anurag Jain
Anurag Jain

Published on: Mar 11, 2024

Maanvi Makker
Maanvi Makker

Updated on: Mar 29, 2024

(31 Ratings)
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The states of Karnataka, Telangana and Andhra Pradesh have the compulsory Gratuity Insurance Rules enforced. These rules mandate the employers to incorporate an insurance fund for the payment of gratuity to employees. Following are the frequently asked questions answered on the applicability and compliance of these rules:

Q1. What do the Compulsory Gratuity Insurance Rules mandate?

Section 4A of The Payment of Gratuity Act,1972 (PGA), mandates the employers to obtain an insurance policy from Life Insurance Corporation of India (LIC) or any other prescribed insurer, in order to meet liability for payment towards gratuity under PGA. However, the said section has provided powers to the ‘Appropriate Government’ to bring this particular provision into effect. In furtherance of this, the State Government of Karnataka has recently come out with Karnataka Compulsory Gratuity Insurance Rules, 2024 (GIR) which specifies the process of obtaining insurance for payment of Gratuity, registration of the establishment under compulsory insurance, incorporation of a Gratuity Trust, etc.

For recognition of a legitimate gratuity fund, the application for approval of a gratuity fund shall be filed under Rule 4(1) of Part C of the Fourth Schedule of The Income Tax Act, 1961 (ITA).

Q2. What do employers with already registered Gratuity Insurance Funds do?

If the employer already has an approved gratuity fund in place which covers the entire liability of all the employees of the establishment and wishes to continue with the same arrangement, he may opt to do so by submitting an application in Form II, within sixty (60) days from the commencement of the GIR (i.e. till 10th March 2024).

Q3. How do new employers obtain Insurance for payment of Gratuity?

In case of a new employer, in order to be compliant with the GIR, the employer is required to obtain a valid insurance policy for his liability for payment towards the gratuity to all eligible employees under the PGA from the LIC or any other insurance company incorporated in accordance with applicable laws, within a period of thirty (30) days from the commencement of the said rules.

Q4. How to get Registration of Establishment under Gratuity Insurance?

Every employer shall submit an application in Form-I, with details of the employees insured to get their establishment registered with the Controlling Authority within thirty (30) days from the date of obtaining insurance along with the list of its employees insured.

Q5. Will these rules apply on the employers if they are registered in multiple locations?

In case of employers that have operations in more than one state, the ‘Appropriate Government’ shall be Central Government, which has yet to come out with specific rules in relation to compulsory insurance. Consequently, in case the employer is operating in only one state; Karnataka, the GIR will be applicable to the entity, however if such employer starts to operate from multiple locations later, the applicable Act will be Central in place of State.

Q6. What is the procedure for Remittance of funds of Gratuity?

An employee is entitled to the payment of Gratuity on termination of his service, if he has rendered services to the employer for a continuous term of five (5) years. The payment is supposed to be made in case the employee is due for his superannuation, retirement/resignation or on his death or disablement – caused due to an accident or disease.

A person who is eligible for payment of gratuity may apply to the employer in the following manner:

Eligible Person Timeline Form Any Other Particulars
Employee Within thirty (30) days from the date Gratuity became payable to him Form I In case the date of superannuation or retirement of an employee is known, the employee may apply to the employer before thirty (30) days of the date of superannuation or retirement.
The application shall be presented to the employer either by personal service or by registered post acknowledgement due.
Nominee within thirty (30) days from the date of gratuity became payable to him Form J An application in plain paper with relevant particulars shall also be accepted. The employer may obtain such other particulars as may be deemed necessary by him.
The application shall be presented to the employer either by personal service or by registered post acknowledgement due.
Legal Heir within one (1) year from the date of gratuity became payable to him Form K The application shall be presented to the employer either by personal service or by registered post acknowledgement due.

Once the employer receives the application for the payment of gratuity and the claim is found to be admissible, the employer should issue a notice in Form L to applicant; employee, nominee or the legal heir stating the payable amount within fifteen (15) days of such claim. He shall fix a date of payment in this notice, within thirty (30) days of receiving the application. The employer may be requested to re fix this date if the applicant specifies reasons for absence on the decided date.

The payment shall be made in mode of cash or, if so desired by the payee, in Demand Draft or bank Cheque to the eligible person.

In case the claim is inadmissible, the employer shall issue a notice in Form M, specifying the reasons of the same to the applicant.

If the claimant for gratuity is a nominee or a legal heir, the employer may ask for such witness or evidence as may be deemed relevant for establishing his identity or maintainability of his claim.

Q7. How should the Gratuity Funds be invested?

In case of companies having an approved gratuity fund, Rule 101 of the Income Tax Rules, 1962 (ITR), will apply wherein all moneys contributed to the fund or received or accruing by way of interest or otherwise to the fund may be deposited in:

  • Post Office Savings Bank Account in India; or
  • in a current account [or in a savings account] with any scheduled bank; or
  • utilised for the purpose of making contributions under Group Gratuity Scheme entered into with the LIC or any other prescribed insurer;

and to the extent such moneys as are not so deposited or utilised shall be invested in the manner specified in sub-rule (2) of rule 67 i.e. the same pattern prescribed and applicable for recognised provident fund.

However, in case of companies not having an approved gratuity fund, they need to obtain an insurance policy from LIC or any other prescribed insurer, in order to meet their liability for payment towards gratuity under PGA.

Good to Know

  1. The bye-law of the gratuity trust shall contain detailed procedures including performance for claiming and releasing of the calculated amount of gratuity to each of the eligible employees on their exit from the service.
  2. The gratuity trust shall adhere to the Indian Accounting Standards 15 (Employee Benefits) and any law applicable to the trust.
  3. The fund shall be a fund established under an irrevocable trust in connection with a trade or undertaking carried on in India, and not less than ninety per cent of the employees shall be employed in India.
  4. All benefits granted by the fund shall be payable only in India.
  5. In state of Karnataka, the number of representatives of Trust is five members, bifurcated in employees and employer representation; in states of Telangana and Andhra Pradesh, there is no prescribed number for representation, however it should be equally divided.
  6. Compulsory insurance of gratuity secures the gratuity benefits of employees even in an adverse scenario of bankruptcy of the company, privy to which, the rules mention incorporation of a Gratuity Trust for the employer employing five hundred or more employees. The Trust shall be managed privately or by the insurance company or jointly by paying the calculated amount to the approved gratuity trust fund periodically by the employer. The funds of the Trust may be managed privately by the trustees or via the Group Gratuity Scheme marketed by the Insurance Company.
  7. The gratuity trust shall maintain a separate gratuity fund, in which the inflow of contributions to the shall be contributory from the employer and non-contributory for the employees and the out-flow of the gratuity fund shall be only to the eligible employees at the time of their exit from service.
  8. The gratuity fund is a totally protected fund and money shall not be withdrawn neither by the employer nor by the gratuity trust under any circumstances for any other purpose other than for the payment of gratuity to the eligible employees.
  9. The employer of the establishment who has obtained valid insurance policy must make all payments by way of premium to the insurance company and renew the same periodically and intimate the same to the Controlling Authority within fifteen days from the date of renewal of the policy. The employer shall initiate the process of payment of premium and renewal of policy before the lapse of the policy.
  10. The Karnataka rules refer to Accounting Standards 15. These standards provide with Actuarial assumptions, which comprise of demographic assumptions and financial assumptions which should be unbiased and mutually compatible. Financial assumptions should be based on market expectations, at the balance sheet date, for the period over which the obligations are to be settled.
    (Please refer to the following link for the standards:www.mca.gov.in/Ministry/notification/pdf/AS_15.pdf)

Foot Notes:

  1. The term ‘appropriate government’ is defined under Section 2(a) of the PGA and identifies Central Government as the appropriate government in following establishments
    • Belonging to or under the control of the Central Government;
    • Having branches in more than one state;
    • Factory belonging to under the control of the central government;
    • Major port, mine, oil field or railway company.
    • Any other establishments will fall under the purview of the relevant state government.
  2. Notification no. No: LD 397 LET 2023 dated January 10, 2024.

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.

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