Debriefing the Karnataka Compulsory Gratuity Insurance Rules,2024

On January 10, 2024, the Government of Karnataka enacted the Karnataka Compulsory Gratuity Insurance Rules, 2024 (“Gratuity Rules”). Similar rules pertaining to compulsory insurance for covering gratuity payments required under the Payment of Gratuity Act, 1972 (“Gratuity Act”) have already been in force in the states of Andhra Pradesh, Telangana, and Kerala. The Gratuity Rules requires current as well as prospective employers in the State of Karnataka to mandatorily secure insurance for the paying gratuity benefit to all eligible employees.

In case of non-compliance with the provisions of the Gratuity Rules, the employer may be held liable to imprisonment for a term of 3 (three) months, which may extend up to 1 (one) year, and/or a minimum fine of INR 10,000/- (Indian Rupees Ten Thousand only) which may extend to INR 20,000/- (Indian Rupees Twenty Thousand only).

APPLICABILITY

The Gratuity Rules are applicable on all establishments operating in the State of Karnataka that have employed 10 (ten) or more persons on any given day in the preceding 12 (twelve) months.

REGISTRATION AND COMPLIANCE

All employers falling within the ambit of the Gratuity Rules are required to submit an application in ‘Form I’, for the registration of their establishment with the Controlling Authority of their respective area or any such other officer appointed for the said purposes, within 30 (thirty) days from the date of obtaining insurance.

Employers are also required to submit ‘Form III’ recording the details of the insured employees at the time of registration of the establishment along with the following changes:

• type of insurance policies;

• change in details of the insured employees; or

• any other related information.

Employers shall, upon obtaining a valid insurance policy, make all payments by way of premium to the insurance company and renew the same periodically. The employers are then obligated to initia¬te the process of payment of premium and renewal of policy before the lapse of the existing policy.

TIMELINE FOR OBTAINING INSURANCE POLICY

All new employers are mandated to obtain a valid insurance policy from the Life Insurance Corporation of India or any other insurance company incorporated in accordance of the applicable laws, within 30 (thirty) days from the date on which the Gratuity Rules become applicable to such establishment.

The employers of an already operating establishment must acquire a valid insurance policy within 60 (sixty) days from the date of commencement of these Gratuity Rules.

GRATUITY FUND AND GRATUTITY TRUST

Employers who have already established an approved gratuity fund for their employees and employers employing 500 (five hundred) or more persons and having an established an approved gratuity fund, and who intend to continue such arrangement may submit an application in ‘Form II’. Such employers will be exempted from the requirement of obtaining compulsory gratuity insurance, provided that the existing approved gratuity fund (“Gratuity Fund”) must cover the entire liability of all employees of the establishment, as provided under the Gratuity Act. Thereafter, the employer shall register the gratuity trust (“Gratuity Trust(s)”) with 5 (five) but not equal number of representatives of the employer and employees with the registration authority notified under the provisions of the Indian Trust Act, 1882 or any other applicable law.

The Gratuity Trusts are obligated to maintain a separate gratuity fund. The contributions to the Gratuity Fund shall be made by the employers only. The payment from the Gratuity Fund is only to be made to the eligible employees at the time of their exit from service. The Gratuity Trust and the insurance company will be held jointly and severally liable for the liabilities under the Gratuity Act.

Further, as per the Indian Income Tax Act, 1961, any sum paid as an employer by way of a contribution towards an approved Gratuity Fund for the exclusive benefit of the employees under an irrevocable trust will be allowable as a deduction for the purposes of the computation of income of the employer.

CONCLUSION

The Gratuity Rules establishes a robust framework for the employers in the State of Karnataka. Beyond the requirement of adequate insurance coverage, the Gratuity Rules emphasize on accountability and transparency, and necessitates the establishments to register themselves and provide comprehensive employee details to the competent authority. The mandatory requirement to procure an insurance policy allows for better financial planning and easier compliance of the provisions of the Gratuity Act, and consequently minimises the blow of penal action on employers.