The Government of Karnataka (GoK), on 10th January 2024, rolled out the Notification No. LD 397 LET 2023outlining the rules on Compulsory Gratuity Insurance for the State (of Karnataka.) The notification requires establishments under the GoK to have compulsory insurance covering the employer’s liability towardsgratuity. The Notification is based on the powers conferred by sub-section (4) of Section 4A of the Paymentof Gratuity Act, 1972 (Central Act No. 39 of 1972). Karnataka follows the Andra Pradesh Government whointroduced similar rules in 2011.

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Commentary to link to the GoK Rules:

When we say Authorities, we mean the “Appropriate Government”. This is defined in the Payment of Gratuity Act, 1972. The Payment of Gratuity Act refers to the Appropriate government as:i. in relation to an establishmenta. belonging to, or under the control of, the Central Government,b. having branches in more than one State,c. of a factory belonging to, or under the control of, the Central Government,d. of a major port, mine, oilfield or railway company, the Central Government,ii. in any other case, the State Government.This is important as it enables us to clarify which establishments have the Central Government as it’sAppropriate Government and which establishments are covered by GoK as the AppropriateGovernment. The part in bold suggests therefore that only those establishments (registered legalentities) that only have operations in Karnataka are affected by the GoK Rules.It is to be noted that the Central Government have not notified similar Rules yet. So will it just be a matterof time? Especially given Section 57 of the Code on Social Security, 2020 (yet to be notified) is atransposition of Clause 4A of the Payment of gratuity Act, 1972. Upon notification of the Code on SocialSecurity, the GoK may need to re-notify these Rules.

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Based on the Rules stated in Payment of Gratuity Act 1972 regarding Compulsory Insurance, the Karnataka Gratuity Rules are summarized as follows:

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Brief Explanation of the above diagram

➢ The Karnataka Gratuity Notification mandates that new employers must secure a valid insurancepolicy within 30 days of the rules becoming applicable to their establishment. Similarly, existingemployers are required to obtain such a policy within 60 days of the rules' commencement.Employers with valid insurance policies are obligated to make premium payments to the insurancecompany and renew the policy in a timely manner, informing the Controlling Authority of therenewal within 15 days. Ensuring the punctual payment of premiums and policy renewals is theresponsibility of every employer.

➢ In the event of gratuity payments, the Controlling Authority has the authority to recover thedetermined amount from the Life Insurance Corporation of India or any other insurance companywith which the employer has obtained insurance, as specified in the rules.

➢ For registration purposes, employers must apply in Form-I to the Controlling Authority within 30days of obtaining insurance, accompanied by a list of insured employees. Additionally, employersare required to update the Controlling Authority on any changes in insured employees or policies.

➢ Employers with existing approved gratuity funds have the option to continue the arrangement byapplying in Form II, provided the fund covers the entire liability of all employees. Furthermore, employers establishing new approved gratuity funds for establishments with five hundred or moreemployees must register with the Gratuity Trust, with representatives from both the employer andemployees.

➢ The Gratuity Trust, whether managed privately, by an insurance company, or jointly, must maintaina separate fund with contributory contributions from the employer and non-contributory for employees. The trust must adhere to relevant accounting standards and laws, and both theemployer and the insurance company share joint responsibility for fulfilling their obligations underthe Act. The employer is required to maintain the gratuity trust and fund as an irrevocable system.➢ In conclusion, the notification emphasizes compliance with the Act, requiring employers to take allnecessary measures to fulfill their obligations under its provisions. This comprehensive framework aims to ensure the timely and secure payment of gratuity to eligible employees in the state of Karnataka.

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Consultant’s Viewpoints:

➢ There are many potential areas that need some clarification from the Rules. Here is a list of the key areas:

• The definition of terms used like “insurance” for Gratuity liability or “towards gratuity payment”etc. need clarification from a few perspectives.➢ Currently, no insurance products exist that will fully insure the gratuity “liability” per say. Theonly insurance under current gratuity funding products is to insure a death in service gratuitybenefit.
• More precise guidance is needed to confirm the definition of “liability”. There can be manyinterpretations such as; full accrued gratuity benefit to date, or the liability accounted in theCompany books per AS15 or INDAS19. If based on Accounting standards, then the GoK willneed to ensure appropriateness and governance of the assumptions being used. An actuarial figure can easily be less than the full asscued benefit). Which does the GoK desire?
• AS15 is mentioned in the GoK Rules in respect of the Trust using an actuarial figure. However,how does that relate to the insurance company calculating their funding requirement/”premium” and the AS15 valuation conducted by the Company for its books?

➢ The wording of the Rules suggests that any establishment with less than 500 employees (orcurrently not having an approved Gratuity Trust) would not be required to create a Trust? In orderto get tax benefits for the contributions and earnings in the fund, the insurance policy should be partof the investment of an approved Trust. In turn this would mean that all establishments would needto make an approved Trust. This may be cumbersome for smaller establishments, especially ongoing compliances, education of Trustees, tax returns etc.. This needs to be clarified by GoK.

➢ Clause 4 in the Rules sets out how the GoK is authorised to recover the amount of the Gratuitypayable to an employee, from the insurer. More detail is needed on how this would work. Can anymaster policy pay to the Appropriate Government? Will policies need to include the Government asa potential beneficiary?➢ The level of funding and quantum of contributions needs careful consideration by a Company/Trust.Many business specific matters such as cashflow, demographics, tax status will influence the meritsof how much to fund and when. Up to now companies have had this freedom to decide. If the Rulesare suggesting an establishment has to be 100% funded (ie fund assets = gratuity liabilities) then itmay be good for employees, but does it lock up vital capital for the business? An actuariallycalculated liability may be more or less than the full accrued service benefit as on date.

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