Are Small Businesses Struggling with Karnataka's New Gratuity Insurance Rules?

Is the company obligated to procure insurance under the Karnataka Compulsory Gratuity Insurance Rules of 2024 if only four employees have completed their five years of service? Considering insurance companies might not provide coverage for such a small number of employees, posing challenges for MSMEs.

If you have ten employees, your establishment will come under the Payment of Gratuity Act and the rules made thereon. It is immaterial how many of your employees have completed the prescribed five years for entitlement of gratuity. Please understand that gratuity is payable to the dependents of a deceased employee even if the employee has not worked for five years. The same applies to cessation of employment due to permanent total disablement also.

Therefore, if you have 10 or more employees, the Act will be applicable to you, and since the Karnataka government has notified section 4A (compulsory insurance of gratuity fund), you have to purchase it.

Hi,

In a significant move to safeguard employee rights and ensure financial security, the Karnataka Government has introduced the Karnataka Compulsory Gratuity Insurance Rules, 2024. Under the new rules, companies can obtain gratuity insurance from the Life Insurance Corporation (LIC) or any other insurance company incorporated under applicable laws. Existing companies must obtain insurance within sixty days (by 10 March 2024), while new employers should secure insurance within thirty days from the date the rules become applicable to their establishment.

(Reference: https://www.plumhq.com/blog/karnatak...0establishment)

Section 4A of the Payment of Gratuity Act, 1972

Section 4A of the Payment of Gratuity Act, 1972 (Gratuity Act) imposes an obligation on employers of establishments with ten or more employees to procure insurance to cover their liability of paying gratuity to exiting employees. However, the requirement of procuring such gratuity insurance arises only if the appropriate government (i.e., the state government) makes rules to give effect to the provisions of this section, by way of a notification. Few states in India, such as Andhra Pradesh and Telangana, have notified compulsory gratuity insurance rules. The government of Karnataka has also joined the said states by notifying the Karnataka Compulsory Gratuity Insurance Rules, 2024 (Gratuity Rules) through a notification dated 10 January 2024, which makes it mandatory for employers to procure an insurance policy to cover their gratuity liability.

Coverage Requirements

If your company comes under the purview of the Gratuity Act, then compulsory gratuity insurance is required regardless of the number of employees who have completed 5 years. You need to cover all employees, not just those who have completed 5 years. A monthly addition/deletion report must be submitted to the insurance company. Coverage will start from day one of the employee joining.