Government Of Karnataka Compulsory Gratuity Insurance Rules, 2024

Introduction

On January 10, 2024, the Government of Karnataka (‘GoK’) issued a Notification No. LD 397 LET 2023 under the stamp and seal of the Under Secretary to Government, Department of Labour, giving legislative sanction to the Karnataka Compulsory Gratuity Insurance Rules, 2024 (‘Rules’).

GoK has effectively notified the Rules relating to Compulsory Insurance, for the State of Karnataka, and covered issues like applicability of compulsory insurance to establishments, the need to establish an Approved Gratuity Trust (‘AGT’) for certain establishments, compulsory registration of covered establishments with the Controlling Authority, fully covering gratuity liabilities, and framing of a Board of Trustees and governance.

It is to be noted that group gratuity policies available in the market are funding vehicles and provide insurance cover for gratuity payable only in case of death-in-service. These policies do not provide insurance coverage against the overall gratuity obligations of employers, which will continue to be accounted for as a liability under the relevant account standards.

Applicability of compulsory insurance to certain establishments

The Rules are applicable to private sector employers/ organisations whose Gratuity schemes/ rules would fall within the jurisdiction of the Government of Karnataka. However, it is our understanding that these Rules shall not be applicable if the employer/ organisation has one or more branch outside the state of Karnataka – this would mean that the “Appropriate Government” would become the Central Government (and not GoK).

Our understanding of the applicability of the Rules to various employer situations (so long as the Appropriate Government is GoK), is tabulated below.

Table 1: Applicability of the Rules to various employer situations

Other significant provisions

Besides the above-mentioned provisions relating to applicability of the Rules, following are certain significant provisions referred to therein:

• Funding: Wherever there is an AGT instituted and continued by an Employer, in lieu of compulsory insurance cover, the entire gratuity liability for all employees needs to be covered, i.e. AGT needs to be fully funded.
• Registration: Every employer needs to get his establishment registered with the Controlling Authority, within 30 days from obtaining insurance cover.
• Composition of Trustees: In cases where an AGT has been instituted, 5 Trustees are to be appointed with unequal representation from the employer’s and employee’s side.
• Adherence to certain legislations: AGTs must adhere to various legislative requirements like AS-15 (Employee Benefits), provisions of the Indian Trusts Act and the Income-tax Act and Rules.
• Recovery: The Controlling Authority is authorised to recover gratuity payable to an employee, as determined by an employer. In case of a dispute, the gratuity amount may be deposited with the Controlling Authority until a decision is reached.

Conclusion

The Rules do bring out the need for employers (so long as the Appropriate Government is GoK) to act within stipulated timelines for either obtaining gratuity cover or instituting an AGT, depending on their specific circumstances.

Employers would need to be cognizant of the following requirements:

• Understand the choices they have in terms of obtaining an insurance cover vis-à-vis instituting an AGT;
• Fully comprehend the repercussions adopting an alternative – for instance seeking an insurance cover without an AGT may not ensure that an employer receives the desired income-tax benefits;
• Adhere to the timelines under which they need to operate; and
• Ensure and establish good governance practices.

While the implications of the above requirements are currently on employers whose Appropriate Government is GoK, this could be a start for other states to follow. The implementation of the Code on Social Security, which has similar provisions, may also mean that such requirements may be mandated more widely, at a national level.

Please feel free to reach out to your WTW consultant or write to WTWIndia@wtwco.com for any questions or guidance around this development.