Group Gratuity Insurance Scheme

Group Gratuity Insurance

Every expanding business has obligations to its staff in terms of both money and the law. One such important liability provided to employees once they have completed five years with the organisation is gratuity. It serves as a retention technique in that it motivates staff to work for the company for an extended period. 

Every business must have enough money on hand to meet the employees’ gratuity needs as they arise. Managing gratuity payments gets more expensive and difficult as the number of employees rises. Having a successful gratuity plan is essential for keeping employees.

What is Gratuity?

The sum given by the employer to an employee who has worked for a firm or organisation for five or more years constitutes gratuity insurance for employees, which is a benefit payable under the “The Payment of Gratuity Act”.

The group gratuity scheme gives the employer a chance to set aside predetermined funds for the employees. To pay off the debt owed to the workers who are entitled to gratuities, money is being saved. Saving money is crucial because the employer is responsible for paying gratuities. The employer can fulfil their duty to provide statutory gratuity benefits to their employees with the help of this scheme. According to the terms of the policy, the policyholder makes annual contributions to protect the gratuity benefit and give a life insurance benefit. In this instance, one account is kept for all of the policyholder’s contributions.

In the following circumstances, gratuity may also be paid before the end of the five years:

  • The employee has passed away.
  • Worker incapacity brought on by any illness or accident.

How Does Group Gratuity Plan Work? 

An employer has the option of paying the employees out of pocket or purchasing a group gratuity insurance coverage from an insurance company.

An organisation must have employed at least 10 individuals on a single day over the previous 12 months in order to be covered under the Gratuity Payment Act. Even if the organisation has less than 10 employees going forwards, coverage will still be maintained. For long-term gains, the money you set aside is invested in a variety of stock and debt funds. When employees leave, claims for gratuity are paid out of the fund established under this scheme.


Mr Abhinav Chaudhary was the owner of his textile mill. He had 350 people working for him for many years. Each month, he deposited a set sum of money to cover his obligations to the staff. Over the past ten years, Aakash had worked with Mr Chaudhary and was considering changing careers. Mr Chaudhary gave him the lump sum gratuity money because he was covered by the gratuity plan.

Different Types Of Group Gratuity Insurance Plans

Here are the two types of Group gratuity insurance plans:

  1. United Linked Plan

A group policy with an indefinite policy period is the Unit Linked Plan. Because it is a group gratuity insurance plan, the sum assured is based on employee salaries and annuity rates. The amount of yearly payments is another factor. The plan provides life insurance coverage for the duration of the policy term, renews automatically every year, and provides tax benefits following current tax rules. The rewards of the policy are dependent on how the market performs.

  1. Non-Participating Endowment Plan

Participating and non-participating plans are the two possibilities offered by endowment plans. Benefits of the insurance are specified at the time of purchase in the case of a Non-Participating Endowment Plan. In this case, the expenses and returns are disclosed up front to the policy buyer.

Advantages Of Funding a Gratuity Scheme to Employees

Here is the list of the advantages of funding gratuity schemes to employees.

  1. Tax Benefits

The annual contribution is accepted as an expense or deduction by the employer when determining taxable income. The employee’s gratuity is tax-free up to the allotted limit and is subject to the restrictions in Section 10(10).

  1. Opportunity Cost

Companies will need to agree to a gratuity trust and raise money from within the company to cover their gratuity liabilities. The alternative uses for the money, as well as the return and duration of that return, could be considered to be the most crucial factors.

One item to keep in mind while conducting such a comparison is the fact that interest collected within a gratuity fund is tax-free. Consequently, after grossing up for tax at 30%, a 10% annual return is comparable to a 14% annual pre-tax return.

  1. Liquidity Management

Companies will be required to pay off the gratuities to departing employees as and when they leave if liabilities are not covered. As a result, because it will be unpredictable how many employees will leave, the amount that employers will pay could differ significantly from year to year. This would be a worry for small or mid-sized businesses because it may have an impact on their cash flow if a few senior staff left with high salaries and long tenures.

  1. Cashflow Stability

The gratuities paid to employees by new businesses would be rare and small. Nevertheless, as workers get older and put in more hours, gratuity payments rise almost tenfold. Companies can replace the rapidly rising gratuity payouts with a comparatively steady stream of contributions to the fund by having the obligations paid.

  1. Cost Management

Once money has been set aside to cover the gratuity liabilities, a well-thought-out investment plan could significantly improve returns while lowering costs for the employer. Although there isn’t a single technique that would work for all businesses, organisations should make sure they can cut costs on investment management by handling the assets themselves.

How much will be paid to the employee (member) in the event of death, retirement, or resignation?

  1. The Master Policyholder will be paid an amount equal to the amount payable to the member under the Company’s Gratuity Rules by cancelling the units of the equal amount from the Master Policyholder’s account.
  1. An additional sum equal to the sum insured for that specific member is paid upon the death of that member.
  1. The Master Policyholder may choose to have the units cancelled from the different funds. The allocation proportion that the Master Policyholder last selected to invest contributions will be utilised if the Master Policyholder does not specify the allocation proportion for cancellation of units.

What will the Organisation Receive?

Tax Benefits

In accordance with the Income Tax Act of 1961’s current rules, approved gratuity funds are eligible for the following tax benefits:

  1. Up to 8.33% of an employee’s income in contributions or premiums paid by an employer in a given fiscal year are considered expenses for tax purposes in the year of payment.
  1. The employee’s gratuity is excluded under Section 10 up to half a month’s average wage for each year of service, with a maximum of Rs. 10,00,000. (10)
  1. Benefits paid upon death are tax-free.

Frequently Asked Questions

Here are some of the frequently asked questions that you must know.

According to the Gratuity Act of 1972, all employers are required to give gratuities to their workers when they leave the company. Importantly, the employer must pay the gratuity within 30 days of the employee’s departure from the company or pay interest to the employee on the amount for the additional days that the gratuity fund was not paid.

Employers must contribute a minimum of Rs. 10,000 to a gratuity system.

The calculation is (15 * Your most recent income * Years Worked) / 30. For instance, your base pay is Rs. 30,000. You’ve provided 7 years of continuous service, and the employer is not protected by the Gratuity Act. (15 * 30,000 * 7) / 30 = Rs. 1,000,000 is the gratuity amount.

Every year of service, an employee is entitled to 15 days of pay as gratuity. The company is required to pay an amount equal to 15 days of the employee’s most recent wage as part of the gratuity for each year of service.