India: Brief On The Notification Of Section 4A Of The Payment Of Gratuity Act

A. Background:

The Payment of Gratuity Act, 1972 ("Act") obligates the procedure and payment of gratuity to employees who have been employed at organizations, as prescribed under the Act. These include factories, shops and other establishments that employ or have employed at least 10 employees in the preceding 12 months ("Establishments"). An individual who has worked in any such Establishment for at least 5 years is considered eligible for receipt of gratuity under the Act.

B. Appropriate Government & Section 4A:

Section 4A of the Act 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. So far, only Andhra Pradesh, Kerala1 and Telangana have notified this Section 4A, making it mandatory to acquire Insurance in these States.

C. 4A Notification by the Karnataka Government:

On January 10th 2024, the Government of Karnataka, notified Section 4A, making it compulsory for all Establishments that are governed by the State Government of Karnataka, to acquire the Insurance ("Notification"). The Insurance must be sought from the Life Insurance Corporation of India, or any other insurance company incorporated in accordance with the Insurance Act, 1938, or IRDAI.

Every new Establishment is required to obtain Insurance within 30 days, while existing Establishments have 60 days from the date of the Notification (i.e. till March 10th, 2024) to comply. Each employer is required to register, via Form I (Application of Registration of an Establishment) along with Form III (Details of Employees of the Establishment covered under the Compulsory Insurance), within 30 days of registering for the Insurance (i.e. April 10th, 2024) and submit the same to the Controlling Authority (as prescribed under the Act). Each employer is further required to pay the related premiums promptly and inform the Controlling Authority, within 15 days, regarding the renewal of the Insurance.

D. Approved Gratuity Trust Fund:

However, 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.

E. Penalty:

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).

Footnotes

1 While the official notification released by the Kerala Government is not publicly available on the government labour website as on date, the case of Chandresekharan Nair G. v. The Kerala State Co-operative Agricultural and Rural Development Bank (2017; 4 KLJ 488) along with certain other legal resources, suggest that the Kerala Government has notified Section 4A of the Act, as on September 13th, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.