On 10 January 2024, the government of Karnataka released compulsory gratuity insurance rules, 2024 (the “Rules”), mandating that businesses in Karnataka, covered under the Payment of Gratuity Act, 1972, obtain an insurance policy to cover their gratuity liabilities.


The Payment of Gratuity Act does not require employers to obtain an insurance policy covering their gratuity obligations unless a state government promulgates rules to that effect. Karnataka joins several other states in India implementing this requirement.

Key details

The Payment of Gratuity Act and the Rules published by the state of Karnataka apply to employers who meet a threshold of having at least 10 employees on any day within the preceding 12 months. Employers currently covered under the mandate to make gratuity payments have 60 days from the commencement date of the Rules (i.e., until 10 March 2024) to obtain a valid insurance policy to cover their gratuity liability. Employers who meet the threshold and become subject to the gratuity payment mandate in the future must contract a policy within 30 days from the date the Rules become applicable to them.

The insurance policy must be obtained from the Life Insurance Corporation of India (LIC) or any other insurance company incorporated in compliance with relevant insurance legislation. Premiums must be paid on-time and the insurance policy must be renewed regularly unless the employee threshold falls below 10 employees.


Employers covered under the Rules mandate have an additional obligation to register with the relevant Administrative Entity (the “Entity”) within 30 days after taking out the insurance policy. This registration requires the submission of an application, including the number of employees insured and other relevant details regarding the gratuity insurance policy (reference number, terms, and conditions etc.). Employers are required to promptly notify the Entity of any changes to the information provided.

Approved Gratuity Trust (AGT)

The Rules specifically exclude companies with a previously established Approved Gratuity Trust (AGT) from the gratuity insurance mandate, but these AGTs must conform with all requirements for an AGT under the Rules.

Employers with 500 or more employees may choose to establish an AGT instead of complying via gratuity insurance. AGTs must be fully funded and cover the gratuity liability of all employees. Additionally, an AGT must:

  • Be maintained as an irrevocable trust,
  • Have a total of five representatives of the employer and employees,
  • Be registered with the relevant entity and comply with provisions of the Indian Trusts Act, 1882, Tax Act, 1961, and any other applicable laws,
  • Be managed privately, by an insurance company or jointly with the trustees,
  • Receive periodic payments from the employer to the AGT,
  • Ensure funds are secure, and withdrawal of the gratuity funds must only occur to pay eligible employees at the end of their service.


Noncompliance with the provisions of the Rules can result in fines ranging between INR 10,000 to INR 20,000 and/or three months to one year of imprisonment, depending on the offence.

Next Steps

Employers with 10 or more employees in Karnataka must assess the impact the Rules on their business and comply accordingly by obtaining a valid gratuity insurance policy or by establishing an AGT within the timeline. Employers with an existent AGT should review their arrangement to ensure compliance with the Rules.