What is Compulsory Gratuity Insurance, how is it different from other insurances, and why do companies procure it before the closure of each financial year?
In this post, I will try to elaborate on Compulsory Gratuity Insurance:
Gratuity benefits under the Payment of Gratuity Act, 1972
Gratuity benefits are governed by the Payment of Gratuity Act, 1972. Section 4A of the Payment of Gratuity Act, 1972 regulates the provisions of Compulsory Gratuity Insurance, and the power of notification of this section lies with State Governments and the Central Government. After the enactment of the Payment of Gratuity Act, 1972, three states notified this section, and the details of the states and years of notifications are as follows:
1st State: Andhra Pradesh: In the year 2011
2nd State: Telangana: Year 2016
3rd State: Karnataka: Year 2024
Requirements for private establishments
All private establishments (i.e., private sector companies, private schools, private colleges, NGOs) in the above three states are required to:
1. Get an Actuarial Report for the assessment of Present Values of Gratuity Obligation and procure compulsory Gratuity Insurance under an Approved Gratuity Fund under the Irrevocable System.
2. Get their companies registered with the Deputy Labor Commissioner of their respective jurisdictions in prescribed forms (i.e., Form I, Form II, & Form III, etc.).
3. Get approval from the Commissioner of Income Tax (CIT) in terms of Part C of the Fourth Schedule of the Income Tax Act, 1961.
It is unnotified in the rest of the states and UTs.
Taxation benefits and voluntary adoption
Due to taxation benefits available to establishments under Section 36(1)(v) of the Income Tax Act, 1961, which are not available when the company makes a provision for Gratuity Liability based on the Actuarial Report in the Balance Sheet under the "Pay as you go Option" (Refer Section 47A(7) of the Income Tax Act, 1961), companies in other states and UTs voluntarily opt for Compulsory Gratuity Insurance before the closure of the financial year.
Upcoming changes with Security Code 2020
A recent development regarding the implementation of Security Code 2020 by the Central Government before 31.03.2025 will make Compulsory Gratuity Insurance applicable to all establishments (i.e., private sector companies, private schools, private colleges, NGOs) in other states and UTs, because Section 57(1) of the Drafts of the Social Security Code 2020 has a similar provision as given in Section 4A of the Payment of Gratuity Act, 1972.
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