Understanding Compulsory Gratuity Insurance: Why Do Companies Need It Before Year-End?

What is Compulsory Gratuity Insurance?

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?

Overview of Compulsory Gratuity Insurance

In this post, I will try to elaborate on Compulsory Gratuity Insurance:

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. Obtain 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. Register their companies with the Deputy Labor Commissioner of their respective jurisdictions in prescribed forms (i.e., Form I, Form II, and Form III, etc.).
3. Obtain 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

In view of the taxation benefits available to establishments under Section 36(1)(v) of the Income Tax Act 1961, which is not available when a company makes provisions for Gratuity Liability based on an Actuarial Report in the Balance Sheet under the "Pay as you go Option" (Refer Section 47A(7) of Income Tax Act 1961), companies in other states and UTs voluntarily opt for Compulsory Gratuity Insurance before the closure of the financial year.

Future Implications of the Social Security Code 2020

A recent development regarding the implementation of the Social Security Code 2020 by the Central Government before 31.03.2025 will make Compulsory Gratuity Insurance applicable for 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.

In case of any queries or requirements for consultation regarding the above matter, you may send an email to [Email Removed For Privacy Reasons] or contact us at [Phone Number Removed For Privacy-Reasons], [Phone Number Removed For Privacy-Reasons].

Compulsory Gratuity Insurance is governed by the Payment of Gratuity Act, 1972, specifically Section 4A. This insurance is mandatory for private establishments in certain states (Andhra Pradesh, Telangana, and Karnataka as of now) as per the notifications issued by the respective state governments.

The main steps involved in procuring this insurance are:
1. Acquire an Actuarial Report to assess the present values of Gratuity Obligation and procure Compulsory Gratuity Insurance under an Approved Gratuity Fund in an Irrevocable System.
2. The establishment needs to register with the Deputy Labor Commissioner of their respective jurisdictions using the prescribed forms (Form I, Form II, and Form III).
3. Obtain approval from the Commissioner of Income Tax (CIT) as per Part C of the Fourth Schedule of the Income Tax Act, 1961.

The reason companies in other states and UTs voluntarily opt for this insurance before the end of each financial year is due to the tax benefits. Under Section 36(1)(v) of the Income Tax Act, 1961, these benefits are not available when a company makes a provision of 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).

The Social Security Code 2020, expected to be implemented by the Central Government before the end of March 2025, will make Compulsory Gratuity Insurance mandatory for all establishments in other states and UTs. This is because Section 57(1) of the draft of the Social Security Code 2020 has a similar provision to Section 4A of the Payment of Gratuity Act, 1972.

The key difference between Compulsory Gratuity Insurance and other insurances is that it is specifically designed to cover the gratuity obligation of an employer towards their employees. It provides a financial safeguard for companies to meet their legal obligations under the Payment of Gratuity Act, 1972.

For any further clarification or consultation on this topic, you can reach out via email at info@gratuitytrustfund.com or contact at 011-45261651, 9211637063.