Gratuity Insurance Questions: When to Enroll New Employees and Who Pays in Unfortunate Events?

I have a doubt regarding the gratuity insurance scheme:

Gratuity Insurance Enrollment Timing

1. When should an employee be insured under the Group insurance scheme—at the time of joining or upon completion of 5 years of service?

Inclusion of New Employees in Insurance Scheme

2. Suppose we pay an annual premium for 100 employees in a year, let's say in January 2012, and in February 2012, 10 new employees join. When should we include these new employees in the insurance scheme—the next year in January 2013, or the same month in February?

Responsibility for Gratuity Payment

3. If an employee joins and unfortunately passes away after 1 month and is not covered by the Gratuity insurance, who will be responsible for paying the gratuity until the retirement age?

Regards

You must provide gratuity coverage for each employee from their date of joining. In the event that any person is left without coverage and, unfortunately, experiences any casualties during the course of employment, the PE will be responsible for payment.

Thanks

Dear sir,

In case of death, does the employer pay for the number of years of service or until the retirement age because the employee is not covered by gratuity insurance? If the employer does not pay, then who will be responsible?

Regards

Gratuity Payment Obligations

In the absence of the applicability of Section 4A of the Payment of Gratuity Act (this section provides that the state government shall enforce the applicability of this section, and therefore, it is not necessary that in all states linking of the gratuity fund to an insurance scheme is mandatory), the employer is bound to pay the gratuity of an employee only until the date of death. Therefore, if the employee dies after working for 3 years, the employer has to pay gratuity based on 3 years of service.

In the case of companies that have a LIC-linked gratuity scheme with an add-on cover for payment of gratuity based on retirement age, obviously, LIC will take care of the same and pay the amount projected to the deceased employee's date of superannuation.

Regards, Madhu.T.K

Immediate Insurance Coverage for New Employees

An employee should be insured immediately after joining and not after 5 years. Even if you insure them after 5 years, the insurance company will recover insurance premiums for the past 5 years' salary paid.

Including New Employees in Insurance

In February, you pay premiums for 100 existing employees. If 10 employees join in March, it is advisable to insure them in March itself, as stated above.

Liability for Gratuity Payment

If an employee dies before being insured by the company under the group gratuity scheme, the company will still be liable to pay. It is essentially the company's obligation to pay the gratuity, a statutory obligation. This should be clearly understood. Your insurance is only a method of managing the financial burden at one time, should such an eventuality arise at any time in the future (for example, a large number of employees retiring or resigning in one year). Also, the contribution to the fund or the actual payment of gratuity on retirement is the only method to get it allowed as expenditure under the Income Tax Act. Mere provision in the books of account is not allowed as expenditure in the Income Tax Act.

Furthermore, under the Income Tax Act, the gratuity is allowable only to the extent it is actually funded by the company (under any group gratuity scheme of an insurance company, as approved by the government).

Monthly Update Option for Employee Insurance

Until recently, the updating of employees was done annually. However, LIC has introduced a new scheme where you can now update the employees joining and leaving the company on a monthly basis. Once you opt for this new scheme, you can have the new employees covered in the month they join. Otherwise, you will have to wait for the next annual update date. If the annual update date falls in January every year, employees who join in January will benefit, whereas those who join in February will have to wait a year to be enrolled in LIC's gratuity scheme.

Regards, Madhu.T.K

Dear sir,

I have read many posts and found that if a company is not covered by Gratuity insurance and an employee dies before completing 5 years of service, then the company will pay gratuity only up to the number of years served, not up to retirement.

Is the employer bound to pay up to retirement? If the employer does not pay up to retirement, is there any legal obligation to do so?

Please clarify.

Paying gratuity projected to retirement age is an arrangement of LIC in return for a minimum amount of additional premium. Therefore, if there is no arrangement with insurers, the employer's liability is limited to the payment of service gratuity only. That means if the employee dies in 3 years, his dependents will get gratuity calculated for 3 years and nothing more.

Madhu.T.K

An addition to what I have stated in my previous post in this thread on this. Just as the payment of gratuity is a statutory obligation of the employer, taking insurance cover is also a statutory obligation of the employer under sec. 4-A of the Payment of Gratuity Act 1972.

Please let me know if you would like further clarification on this topic.

Gratuity Fund Notification and State Variations

Section 4A(1) states that the appropriate government shall notify the date on which the compulsory insurance of the gratuity fund shall come into force. The state government is the appropriate authority, and many states are yet to notify it. In the case of Ratnavalli Vs Ambalappadu Service Cooperative Bank Ltd (2005 (3) KLT 320, 2005 III LLJ 379 Ker), the Kerala High Court ruled that since the Kerala Government had not notified the applicability of section 4A, the employer was not under any obligation to link its approved gratuity fund to LIC.

Last year, Kerala also notified that the gratuity fund should be invested in LIC. Therefore, different states may have different dates regarding this matter.

Regards, Madhu.T.K