Introduction
The Government of Karnataka published and made effective the Karnataka Compulsory Gratuity Insurance Rules, 2024 on 10th January 2024. This notification pertains to the funding of gratuity liabilities of an establishment which is not under the control of Central Government or State Government.
Stipulations
The Karnataka Compulsory Gratuity Insurance Rules, 2024 state that every new employer shall obtain insurance for payment of gratuity within a period of 30 days from the date of incorporation. Such insurance can be obtained from the Life Insurance Corporation (LIC) of India or any other insurance company. Furthermore, existing employers are also required to obtain a valid insurance policy within 60 days from the date of these rules coming into effect. The rules mandate every employer who has obtained a valid insurance policy to renew the policy periodically and make all payments by way of premium to the insurance company with proper due diligence.
The rules also stipulate that employers with more than 500 employees or with pre-existing approved trust funds can register the Gratuity Trust with the registration authority notified under the provisions of the Indian Trust Act, 1882. Such a gratuity trust can be maintained privately, or by an insurance company, or jointly by paying the calculated amount to the approved gratuity trust fund periodically by the employer. The investments of a privately managed gratuity trust fund shall be done as per the provisions of the Income Tax Act, 1961 and approved by the Board of Trustees and the entire administration of the gratuity trust. A separate trust fund will be maintained to which the employer solely shall contribute and the gratuity payment to the eligible employees at the time of their exit shall be the only outgo from the gratuity fund.
Implications
Karnataka follows the states of Andhra Pradesh and Telangana in implementing such requirements for companies. With the introduction of these rules, unfunded entities will have to set up trust funds for their gratuity liabilities. Employers can avail tax advantages by making contributions to the trust fund under such an arrangement. Furthermore, since the assets of the trust are irrevocable, it offers a level of security to employees for the payment of their gratuity dues.
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