Law and You > Labour Laws > The Code on Social Security, 2020 > Compulsory Insurance of Gratuity Fund under the Social Security Code, 2020
A gratuity is a form of financial compensation given to employees by an organisation to express their gratitude for the work done. It is a form of acknowledgement of their efforts and contributions to the company’s growth and development. The amount is usually calculated based on the employee’s service tenure and last drawn salary. It serves as a morale booster for employees, recognising their hard work and dedication towards the company. The provisions about Gratuity under the Social Security Code, 2020 provides for the appointment of controlling authorities to settle disputes between employers and employees regarding gratuity payments. Gratuity is usually given to employees who have worked for the company for continuous five years minimum. Employers must obtain insurance coverage for their gratuity liabilities, and failure to comply with the Act can result in penalties and legal action. Chapter V of the Social Security Code, 2020 containing Sections 53 to 58 deals with Gratuity. In this article, let us discuss provisions related to compulsory insurance of gratuity fund.
Compulsory Insurance of Gratuity Fund:
Compulsory insurance for gratuity funds is a beneficial measure to ensure the financial security of employees regarding their gratuity payments. It mitigates the risk of non-payment due to an employer’s financial distress and provides peace of mind for employees. While it may increase costs and administrative duties for employers, the advantages of securing employee benefits and ensuring legal compliance outweigh the potential drawbacks.
According to Section 57(1) of the Social Security Code, 2020 with effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of subsection (2), obtain an insurance in the manner prescribed by the Central Government, for his liability for payment towards the gratuity under this Chapter, from any insurance company regulated by the Authority as defined under clause (b) of sub-section (1) of section 2 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999)
The proviso attached to Section 57(1) of the Social Security Code, 2020 lays down that different dates may be appointed for different establishments or class of establishments or for different areas.
The provision mandates every employer to compulsorily acquire insurance for his liability towards payment of gratuity under the Act (“Insurance”), once notified by the ‘appropriate government’. The term ‘appropriate government’ determines the purview of the rules/notifications under the Act. It’s important to note that, for Establishments having offices/Establishments in more than one State, the appropriate government would be the Central Government and for any other Establishment, it would be the State Government. Various State Governments have prescribed rules regarding compulsory insurance of gratuity fund.
Every employer shall ensure timely payment of premium to the insurance company, periodic renewal of insurance and intimation to the Controlling Authority within 15 (fifteen) days from the date of renewal.
Exemption from Compulsory Insurance:
According to Section 57(2) of the Social Security Code, 2020 the appropriate Government may, subject to such conditions as may be prescribed by the Central Government, exempt any employer who had already established an approved gratuity fund in respect of his employees and who desires to continue such arrangement, and every employer employing five hundred or more persons who establishes an approved gratuity fund in the manner prescribed by the Central Government from the provisions of sub-section (1).
Appropriate Government also has the power to grant certain exemptions. ‘Appropriate Government’ under the Gratuity Act means: (a) the Central Government, for inter alia establishments having branches in more than one state, and (b) the State Government, in other cases.
As per notification by the Karnataka Government (January 10th 2024), any Establishment that has more than 500 employees and has established an approved gratuity fund, that covers the liability of his employees entirely, may continue to operate under this approved fund by submitting Form II to the Controlling Authority. In case such employers wish to incorporate a gratuity fund trust, they must comply with the applicable provisions of the Indian Trust Act, 1882, Indian Accounting Standards 15 and the Income Tax Act, 1961.
The gratuity trust may be managed privately, by an insurance company or jointly, with the employer periodically paying the calculated amount to the approved gratuity trust fund; and the trust must be maintained as an irrevocable system. The trust and the insurance company will be jointly and severally responsible for fulfilling liabilities under the Gratuity Act. In case the gratuity fund is privately managed, the investment of funds should be in accordance with the investment pattern prescribed under the Income Tax Act, 1961, and in case of group scheme obtained from any insurance company, the same should be approved under part-C of the fourth schedule of the Income Tax Act, 1961.
Additional obligations for maintaining a gratuity trust are prescribed – such as the trust deed and rules must contain detailed procedures on payment of gratuity to eligible employees on exit, the trust must adhere to Indian Accounting Standards 15 and the trustees must send a discharge letter and request the insurance company to pay out the relevant amounts.
As per notification by the Karnataka Government (January 10th 2024), any failure to comply with the Notification may attract (i) a specific penalty of a fine of up to INR 10,000 (Indian Rupees Ten Thousand), and in case of a continuing offence, an additional fine of up to INR 1000 (Indian Rupees One Thousand) for every consecutive day of non-compliance; and (ii) a general penalty of imprisonment for not less than three months and/or a fine amounting to not less than INR 10,000 (Indian Rupees Ten Thousand) and up to INR 20,000 (Indian Rupees Twenty Thousand).
Compulsory Insurance Mandatory to Register with Competent Authority:
According to Section 57(3) of the Social Security Code, 2020 for the purposes of effectively implementing the provisions of this section, every employer shall within such time as may be prescribed by the Central Government get his establishment registered with the competent authority in the manner prescribed by the appropriate Government and no employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2).
Board of Trustee for Approved Gratuity Fund:
According to Section 57(4) of the Social Security Code, 2020 the appropriate Government may provide for the composition of the Board of Trustees of the approved gratuity fund and for the recovery by the competent authority of the amount of the gratuity payable to an employee from the insurer with whom an insurance has been taken under sub-section (1), or as the case may be, the Board of Trustees of the approved gratuity fund, in such manner as may be prescribed.
The Controlling Authority can recover the gratuity payable to an employee (as computed by an employer in accordance with the Gratuity Act), including where there is a dispute, directly from the insurance company with whom the employer has taken insurance.
According to Section 57(5) of the Social Security Code, 2020 where an employer fails to make any payment by way of premium in respect of the insurance referred to in sub-section (1) or by way of contribution to an approved gratuity fund referred to in sub-section (2), he shall be liable to pay the amount of gratuity due under this Chapter (including interest, if any, for delayed payments) forthwith to the competent authority.
Explanation.— In this section, “approved gratuity fund” shall have the same meaning as assigned to it in sub-section (5) of section 2 of the Income-tax Act, 1961 (43 of 1961)
Conclusion:
The compulsory insurance for the gratuity fund involves mandating employers to secure an insurance policy to cover their gratuity liabilities. This ensures that employees receive their gratuity payments even if the employer faces financial difficulties. The main purpose of compulsory insurance for gratuity funds is to protect employees’ entitlements by guaranteeing the payment of gratuity, regardless of the employer’s financial situation. Under this provision employers take out an insurance policy with a recognized insurer to cover their gratuity liabilities. Premiums are paid by the employer based on the estimated gratuity liabilities. Due to the compulsory insurance of gratuity fund employees are assured of receiving their gratuity payments. Employers can manage their gratuity liabilities more effectively and avoid sudden large pay-outs. Companies can plan and budget for gratuity payments more predictably. Due to compulsory insurance of gratuity fund, employers may face increased costs due to insurance premiums. Managing insurance policies and ensuring compliance can add to administrative duties. Overall, compulsory insurance for gratuity funds contributes to a more stable and fair employment environment, protecting the rights and financial interests of employees.