Gratuity is one of the most important benefits an employee receives for long-term service. It is a lump-sum amount paid by an employer as a reward for loyalty, typically when an employee retires, resigns, or is laid off. In India, gratuity is governed by the Payment of Gratuity Act, 1972, and eligibility generally starts after five years of continuous service with the same employer.
In Karnataka, gratuity has become a trending topic due to new compliance requirements. Employers and employees alike are asking: Can companies delay gratuity payments? What happens if they don’t prepare in advance? Are employees adequately protected?
The answer lies in the Karnataka Compulsory Gratuity Insurance Rules, 2024.
Why is Everyone Talking About Gratuity in Karnataka?
The Payment of Gratuity Act mandates that employers must pay gratuity to eligible employees. However, many companies struggle to set aside funds, leading to delays or defaults.
To address this issue, Karnataka introduced the Compulsory Gratuity Insurance Rules, 2024, ensuring employers plan ahead. Under this system, employers must take a gratuity insurance policy (from LIC or another approved insurer) or establish a separate gratuity trust fund.
The Karnataka Labour Department has already started sending notices to companies, asking them to prove compliance.
What is Gratuity Insurance?
Gratuity insurance is a financial safeguard that ensures employers always have enough money to pay gratuity obligations. Here’s how it works:
- Employers pay a fixed annual premium to an insurance company.
- The insurance fund grows over time.
- When an employee retires, resigns, or becomes eligible, the insurance covers gratuity payments.
This system prevents companies from struggling during financial downturns and guarantees timely payouts to employees.
Karnataka Compulsory Gratuity Insurance Rules, 2024
The rules, notified on January 10, 2024, require all establishments covered under the Payment of Gratuity Act to:
- Obtain a gratuity insurance policy from an approved insurer, or
- Set up a separate gratuity trust fund.
The primary aim is to ensure employees receive gratuity payments reliably and on time — regardless of the financial condition of their employer.
This regulation marks a significant step toward employee welfare and employer accountability in Karnataka.
Interim Relief by the High Court
Following industry pushback, several organizations approached the Karnataka High Court for more time. On April 28, 2025, the court granted interim relief, restraining the state government from taking coercive action against non-compliant employers.
This temporary relief gives employers a short window to:
- Arrange gratuity insurance, or
- Show proof of a separate gratuity fund.
However, this is not a permanent exemption. Once the interim relief ends, the Labour Department will resume strict checks and impose penalties for non-compliance.
Why Should Employers Act Now?
If your company has more than 10 employees in Karnataka, gratuity compliance is mandatory. Ignoring it could result in:
- Penalties up to ₹10,000 per violation
- Daily fines until compliance is achieved
- Legal action under the Payment of Gratuity Act
To stay compliant, employers should:
- Estimate future gratuity liabilities
- Take a gratuity insurance policy from LIC or another approved insurer
- Maintain proper documentation and records
What Does This Mean for Employees?
For employees, gratuity is not a favour — it is a legal right. With compulsory insurance in place, workers can feel confident that gratuity will be paid on time, even if the employer is struggling financially.
Employees are also entitled to ask their HR department about gratuity insurance or other arrangements. Transparency is part of the law.
The Future of Gratuity in Karnataka
Gratuity is no longer just a retirement bonus. It is a legal, financial, and compliance responsibility. Karnataka is setting a strong precedent by making gratuity more secure and transparent. Other states may soon follow this path, ensuring nationwide employee protection.
Conclusion
The landscape of gratuity management in Karnataka is evolving rapidly. For employers, this is the time to act decisively and comply with gratuity insurance requirements. For employees, it’s essential to stay informed and proactive about your rights.
In short:
- Employers must treat gratuity as a compliance priority.
- Employees can expect more protection and security.
Karnataka’s move is reshaping how India thinks about gratuity — from a one-time retirement benefit to a structured financial safeguard for every worker.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Gratuity laws and compliance requirements may vary. For specific guidance tailored to your situation, consult a qualified legal professional such as Bisani Legal. Always seek expert advice before making decisions.
Published by: Mr. Saket bisani
Date: 28/08/2025
