On January 10, 2024, the Karnataka Government published the Karnataka Compulsory Gratuity Insurance Rules, 2024 (“Rules”) (vide Notification No: LD 397 LET 2023).

The Rules prescribe the requirement for employers to obtain a valid insurance policy for the employer’s liability towards payment of gratuity to eligible employees in accordance with the provisions of the Payment of Gratuity Act 1972 (“Act”). It aims to establish a framework for gratuity insurance and ensure timely payouts to eligible employees.

Few key provisions are briefly explained below.

Obtaining Insurance for payment of gratuity: The employer of an establishment which is in existence will have 60 days, and every new employer will have 30 days from the date of commencement of these Rules to obtain a valid insurance policy. The insurance policy can be obtained from Life Insurance Corporation (“LIC”) or any other insurance company incorporated under applicable law for insurance companies.

The employer of the establishment who has obtained valid insurance policy is required to 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 15 days from the date of renewal of the policy.

Recovery of amount of Gratuity: The Controlling Authority is authorized to recover the amount of gratuity payable to an employee from LIC or any other insurance company with whom an insurance has been taken.

Registration of establishment: Every employer must submit an application in the prescribed format (Form-I, annexed to the Rules), for registration of establishment within 30 days of obtaining the insurance along with the list of its employees insured;

Moreover, the employer must furnish the details of the employees insured, to the Controlling Authority or any other officer notified, in the prescribed format (Form-III, annexed to the Rules), at the time of registration of the establishment and thereafter whenever there is a change in the employees insured or policies or any other pertinent information.

Continuation of approved gratuity fund: Every employer who has already established an approved gratuity fund or has 500 (five hundred) or more employees employed, may opt to continue / adopt such arrangement by submitting an application in the prescribed format (Form-II, annexed to the Rules), provided that such approved gratuity fund covers the entire liability of all the employees of the establishment under the provisions of the Act.

Incorporation and conditions of gratuity trust

(i) Every employer of an establishment who had duly established an approved gratuity fund in respect of his employees and who desires to continue such arrangement and every employer employing 500 (five hundred) or more employees who establishes an approved gratuity fund will register the gratuity trust with 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.

(ii) The gratuity trust will 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. Provided that in case of privately managed gratuity trust, investment of funds will be done as per the provisions of the Income Tax Act, 1961 by the Board of trustees and entire administration of the gratuity trust including actual valuation will be the responsibility of the Board of trustees.

(iii) The gratuity trust must maintain separate gratuity fund. The inflow of contributions to the gratuity fund will be contributory from the employer and non-contributory for the employees. The out-flow of the gratuity fund will be only to the eligible employees at the time of their exit from service. The gratuity fund is totally protected fund and money will neither be withdrawn 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.

(iv) The bye-law of the gratuity trust will 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.

(v) The gratuity trust will adhere to the Indian Accounting Standards 15 (Employee Benefits) and any law applicable to the trust.

(vi) The Board of trustees of the gratuity trust at the time of exit of an employee will duly send discharge letter and advise insurance company or make arrangement of payment of gratuity as per the scheme.

(vii) The employer gratuity trust and the insurance company are jointly and severally responsible for fulfilment of their liabilities under the Act.

(viii) The employer is required to maintain the gratuity trust and gratuity fund, as an irrevocable system, at all times.

Credits: Pallavi Puri (Partner)

Arnav Mittal (Associate), Jasmine Brar (Associate)