Group Gratuity Insurance Plan - Everything you need to know
Feeling overwhelmed with the latest rules around setting Gratuity insurance? Don't worry. Our in-depth guide around Group Gratuity Insurance will help with break down of the law and suggest the best way ahead for you. Read on!
An Introduction to Gratuity
What is Gratuity?
As per the Payment of Gratuity Act, 1972 (the Act), it is mandatory for organisations with more than 10 employees to pay Gratuity to all employees who complete 5 continuous years of service, on their superannuation, retirement, resignation, death or disablement due to accident or disease.
Gratuity payable is calculated as No. of years served * Monthly Basic Salary * 15 / 26.
For whom is the Gratuity Act of 1972 applicable to?
The Gratuity Act of 197s is applicable for all organisations who have 10 or more employees at any point of time.
What is Group Gratuity Insurance?
A group gratuity insurance is essentially a funded account that is set up with a life insurance company. The funds in the account are managed by the insurance company. The fund helps the employer save money to pay gratuity to the employees as and when it becomes due.
Why is Group Gratuity Insurance required?
As per the Gratuity Act of 1972, every employer shall obtain insurance towards their liability for payment of gratuity from a Life Insurer registered in India, OR establish an approved gratuity fund.
Why should companies in Karnataka buy Group Gratuity Insurance now?
On 10th January 2024, Government of Karnataka vide Notification No. LD 397 LET 2023 implemented Karnataka Compulsory Gratuity Insurance Rules, 2024, which makes it mandatory for companies registered in Karnataka to have Gratuity Insurance.
Why did the Karnataka government implement the Gratuity Insurance Rules?
The underlying ethos of such a circular is to build social security measures for employees and to ensure their financial well being is protected. Companies, especially startups, work on new business models and need to attract the best talent.
These are, however, high risk ventures at times and may or may not succeed leading to companies winding up operations. Hence to secure the benefits for employees working with them, the Government has implemented this provision of the Act.
It helps the employees get benefits like Gratuity, even if the company goes under.
What are the benefits of Group Gratuity Plan for the company and its employees?
Benefits of Group Gratuity Insurance for companys
- Timely settlement of gratuity for employees who leave the organisation
- Professionally managed fund with regular returns
- Ability to choose from aggressive vs conservative returns options based on risk appetite
- Zero risk of reserves depleting as the funds are secured in an irrevocable trust
- Income tax benefits on funding & returns
Benefits of Group Gratuity Insurance for employees
- Security of funds
- Timely gratuity payment at the end of their tenure
What are the available solutions?
Option A (recommended)
- Establish a Gratuity Trust
- Via the trust, create a Gratuity Account with a Life Insurance company
- Fund the account with appropriate amount based on your estimated liabilities
- Choose the type of plan you want with the insurance company - Unit Linked or
- Traditional plans. Unit Linked Plans (ULIP) are market linked and provide varying returns based on the fund performance; whereas Traditional plans provide guaranteed returns for the chosen time period (tenure). Based on your choice, the insurance company would then manage the fund on your behalf.
Option B (only available for organisations with >500 employees)
- Establish a Gratuity Trust
- Fund the trust with appropriate amount based on your estimated liabilities
- Manage the funds in the trust on your own
Note: Our recommendation is for companies having employees only in Karnataka, Andhra Pradesh or Telangana alone. If you have employees outside these states and registered with EPF/Profession Tax authorities in states other than the ones above, i.e. processing payroll as per other states as well, the circular may not apply to you immediately, as the “Appropriate Government” shall be Central Government. We would however recommend exploring insurance options, and creating reserves nonetheless as a prudent risk management practice.
Group Gratuity Insurance Made Better with Plum
What are the solutions offered by Plum?
Plum will be available to guide with end to end solution for all interested companies in setting up an irrevocable Gratuity Trust, along with actuarial valuation of gratuity liability of the company towards eligible employees and the subsequent investment of these funds into investment options managed by Life Insurance companies for gratuity schemes.
Plum will also be able to provide relevant paperwork for registration with the Controlling Authority in the prescribed format.
How can Plum help?
- Your employee benefits program gets better with everything managed through a single partner and the same account manager.
- You get the most seamless set up and management experience for your Gratuity program.
- You get a comprehensive resource kit that will help you set this up for your team.
- You get access to the best Insurers, Banks, CAs and CSs to help you navigate through this compliance.
FAQs
We are a <500 member team, how can we buy Group Gratuity Insurance?
Currently there are no readily available insurance providers who can provide for both past and future service gratuity liability.
Insurance companies may build such a product in due course.
Till then, companies can opt to create a Gratuity Trust and invest gratuity funds through the Trust into investment options managed by Life Insurance companies for gratuity schemes.
We are a 5 member team, do we need to set up Gratuity now?
The Gratuity Act & these rules apply to organisations having 10 or more employees.
We are incorporated in Karnataka but have offices in other states as well, does the Karnataka Compulsory Gratuity Insurance rules apply to us?
While the current rules are implemented by Govt. of Karnataka and the Controlling Authority for your team would be the Central Govt.
The Payment of Gratuity Act, 1972 also states Central Act and applies to all organisations in India.
We would recommend setting up the insurance or Gratuity Fund for your team.
We had 15 employees at one point of time but are now a lean team of 7 members, do we still have to buy Group Gratuity insurance?
Yes, as per the Gratuity Act, any company once eligible to provide for gratuity to employees shall remain liable to pay gratuity to all employees even if the count falls below 10 at a later date.
I have already invested the funds through the Trust for Gratuity Insurance Scheme - but now have had employees exiting the firm who are not eligible for gratuity.
What will happen to the funds that were invested?
Gratuity funds managed by insurers are invested through an irrevocable Trust.
Setting up an irrevocable gratuity trust ensures all gratuity amounts can be used only for payment of gratuity towards eligible employees and for no other purposes.
What would be tax benefits available by investing through a Gratuity Trust?
Up-to 8.33% of applicable pay (annual wage bills) - is the limit up-to which total funds invested can be deemed exempt from tax liability. Funds invested over and above 8.33% of the applicable pay limit - will be liable for tax deductions.
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