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The Karnataka government recently made gratuity insurance mandatory for all companies. This will ensure that the grautuity amount payable to employee at the time of retirement or leaving the job is does not remain unpaid due to the financial problems of the company. So what is the new rule and how does it help the employees. Read all about it here.

The Gratuity Act was implemented in 1972 for the protection of employees’ interests. Under this Act, institutions with 10 or more employees would be eligible for gratuity. This is essentially a financial benefit given to employees as a reward for their long-term association with their institution. When an employee serves an institution for five years or more, they are entitled to gratuity upon resigning, being terminated, or retiring from the job. The amount received as gratuity depends on the employee’s length of service and monthly salary at the company.

There is a formula to calculate the amount of gratuity a worker will receive upon leaving the company. Normally, 15 days’ salary for each year of service is given. However, weekends are not included in this calculation. Therefore, gratuity is calculated based on 26 days per month. For example, if a person has worked in the textile company for 28 years and his last monthly salary is  30,000 rupees,  then his gratuity will be calculated based on this formula – Gratuity = Monthly Salary x Years of Service x 15/26, which means 30,000 x 28 x 15/26. Therefore, Ramesh will receive a gratuity of 4,84,615 rupees.

If a company wishes, it can also offer gratuity exceeding 15 days per year. Some companies do this to enhance their branding and gain the trust of their employees.

To fulfil the obligation of paying gratuity, some companies also opt for group gratuity insurance. Almost all life insurance companies in the country are selling this product. All employees should receive their gratuity payment on time. This is why the Karnataka government has made it mandatory for all companies to take gratuity insurance from 2024.

Similar to other insurance covers, for gratuity insurance, an annual premium must be paid. For example, if there are 100 employees in the ABC company. If the company takes insurance to fulfil its gratuity obligations, then it will have to pay an annual premium. As the company increases the salary of its employees every year, the amount of gratuity cover will also increase. Therefore, the amount of insurance premium also increases every year. A corpus is formed for the company from the annual premium for gratuity. The gratuity payment for employees is made from this fund.

This means that if a company gets stuck in a financial crisis, the insurance company will continue to pay the employees’ gratuity. This way, employees won’t have to wander aorund for payment.

The relief for the company is that the amount of the premium for gratuity insurance can be added to its expenses and can be deducted from its annual income, taking advantage of the tax deduction. In the government sector, the gratuity received by an employee at the time of retirement is completely tax-free, while in the private sector, up to 20 lakh rupees is tax-free under certain conditions.

Tax and investment expert Balwant Jain says that the Karnataka government has taken a commendable step by making gratuity insurance mandatory for companies. This will relieve the company management from worrying about gratuity payments. If an institution gets stuck in a financial crisis, its employees will remain worry-free about the payment of gratuity. In such a situation, the insurance company will make the gratuity payment. Both the company and the employees will benefit from the government’s initiative.

There has been a wave of employee layoffs in the country for some time now. Big companies can bear financial crises, but it becomes difficult for startups and small companies to pay gratuity in cases of mass layoffs or group resignations. Group gratuity insurance is a good option to avoid such situations. Currently, this insurance has become mandatory only in Karnataka. If other states also take such an initiative, it will benefit a large number of employees.