Background
The Payment of Gratuity Act, 1972 (hereinafter referred as POGA 1972) mentions the following in its clauses 1 and 4 of section 4A Compulsory Insurance,
(1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain an insurance in the manner prescribed, for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956 (31 of 1956) or any other prescribed insurer: Provided that different dates may be appointed for different establishments or class of establishments for different areas.
(4) The appropriate Government may, by notification, make rules to give effect to the provisions of this section and such rules may provide for the composition of the Board of Trustees of the approved gratuity fund and for the recovery by the controlling authority of the amount of the gratuity payable to an employee from the Life Insurance Corporation of India or any other insurer with whom an insurance has been taken under sub-section (1), or as the case may be, the Board of Trustees of the approved gratuity fund.
In spirit, POGA 1972 wanted employers to fund their gratuity obligations and protect employees’ benefits. The act, however, left it for the states to decide whether they would want to make the funding compulsory.
The essence of the sub section 1 is that an appropriate government may require an employer to go in for a compulsory gratuity insurance policy with the LIC or any other insurer. The appropriate government, as defined in the definitions, includes state governments as well. The sub section 4 allows a state government to issue a notification to that extent.
As funding was not mandated by POGA, 1972, there are a significant number of employers who have not opted to fund their obligations and maintain un-funded provision in their books.
After 52 years, the Karnataka state govt. chose exercise this clause in January of 2024 and mandated compulsory funding of gratuity obligations.
Karnataka State Govt. Notification 2024
Some of the key features of the of the notification are as follows:
- The notification is applicable from 10th January 2024.
- A new employer will have to obtain an insurance policy within 30 years of from the rules become applicable to it.
- An existing employer will have to obtain an insurance policy within 60 days from the date of commencement of the rules.
- An employer shall submit an application in Form-I to get the establishment registered with the Controlling Authority of the area within thirty days from the date of obtaining insurance along with the list of its employees insured.
- An employer shall furnish the details of the employees insured, to the Controlling Authority in Form-III at the time of registration of the establishment and after that whenever there is a change in the employees insured or policies or any other pertinent information.
- An employer will have to maintain an approved gratuity trust, which will maintain the fund.
- Contributions to the gratuity fund shall be contributory from the employer and non-contributory for the employees.
- The out-flow of the gratuity fund shall be only to the eligible employees at the time of their exit from service.
- The gratuity fund is 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.
- The Board of trustees of the gratuity trust at the time of exit of an employee shall duly send discharge letter and advise Insurance Company or make arrangement of payment of gratuity as per the scheme.
- The employer shall always maintain the gratuity trust and gratuity fund, as an irrevocable system.
Employers registered in Karnataka will have to compulsorily set up a trust fund to meet the gratuity obligations. The trust can either opt for group-gratuity scheme offered by insurers or opt for self-management of assets.
A group gratuity scheme, offered by most life insurers, is essentially an asset management product with an insurance wrapper. It conveniences employers as the insurers takes on the burden of managing the investments in accordance with the Income Tax Act. An employer is required a contribute an annual “premium” to keep the “policy” alive. The annual premium/contribution is allowed as an expenditure/deduction, up to a certain limit, in computation of taxable income.
Fund management charges, along with administration and policy charges, are deducted from the fund on a monthly (or quarterly) basis.
In our experience, most employers opt-in for group gratuity scheme offered by insurers and avoid the hassle of managing the monies on their own.