Compulsory Insurance for Gratuity - Not Mandatory
Question - Our establishment is covered under the Payment of Gratuity Act. We have been advised by our payroll adviser that we have to get ourselves compulsorily an insurance policy for the payment of gratuity with the Life Insurance Corporation. Is he justified and desirable?
Answer - Neither he is justified nor it is desirable. It is pertinent to state here that the Central government, vide Amendment Act No.22 of 1987, has inserted section 4A under the Payment of Gratuity Act, under the caption of ‘compulsory insurance'. Such insertion of compulsory insurance has not been notified for all these years, but at the same time it has created a misunderstanding amongst the employers who have obtained compulsory insurance. It leads to blocking of working capital.
As it is not at all compulsory, the employers or their advisors or executives should not be misled in continuation of implementation of section 4A of the Act.
Payment of Gratuity Act, 1972 - Section: 4A Compulsory insurance
(1) 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 sub-section (2), obtain an insurance in the manner prescribed, for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956 (31 of 1956) or any other prescribed insurer:
Provided that different dates may be appointed for different establishments or class of establishments or for different areas.
(2) The appropriate Government may, subject to such conditions as may be prescribed, exempt every 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 from the provisions of sub-section (1).
(3) For the purpose of effectively implementing the provisions of this section, every employer shall within such time as may be prescribed get his establishment registered with the controlling authority in the prescribed manner 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).
(4) The appropriate Government may, by notification, make rules to give effect to the provisions of this section and such rules may provide for the composition of the Board of Trustees of the approved gratuity fund and for the recovery by the controlling authority of the amount of the gratuity payable to an employee from the Life Insurance Corporation of India or any other 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.
(5) Where an employer fails to make any payment by way of premium to the insurance referred to in sub-section (1) or by way of 'contribution to all approved gratuity fund referred to in sub-section (2), he shall be liable to pay the amount of gratuity due under this Act (including interest, if any, for delayed payments) forthwith to the controlling authority.
(6) Whoever contravenes the provisions of sub-section (5) shall be punishable with fine which may extend to ten thousand rupees and in the case of a continuing offence with a further fine which may extend to one thousand rupees for each day during which the offence continues.
Explanation : In this section "approved gratuity fund" shall have the same meaning as in clause (5) of section 2 of the Income-tax Act, 1961 (43 of 1961)].
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