What Is a Group Gratuity Insurance Plan and Why Should Employers Offer It?

Retaining and recruiting the best human resources in today's workplace take more than an adequate compensation package. Today's workers seek economic security, long-term welfare, and employers who genuinely invest in their future. A Group Gratuity Insurance Plan comes in here, not as a statutory provision, but as a way of creating trust and commitment between the workforce. While most organisations consider gratuity as an ad-hoc retirement bonus, visionary employers appreciate its true value when designed with a formal group gratuity scheme.

Let us discover what a group gratuity insurance scheme is, why it matters, and why increasingly organisations are turning to it as one of their employee benefit packages.

Learning the Group Gratuity Insurance Plan

A Group Gratuity Insurance Arrangement is an arrangement under which employers are able to fund their statutory gratuity obligation in a tax-effective and orderly manner. Rather than paying gratuity funds directly from the company's operating fund at the retirement or departure of an employee, organisations pay into a fixed gratuity fund, which is administered and guaranteed by an insurance company. The fund accumulates over time through employer contribution and investment returns, offering sufficient cover of gratuity obligation without impacting company cash flow.

In India, the employers having ten or more workers are liable to pay gratuity to workers who have five or more years of continuous service under the Payment of Gratuity Act, 1972. A group gratuity scheme offers compliance with several other benefits to the workers and employer.

Key Features and Benefits of a Group Gratuity Scheme

Before delving into why this model must be embraced by employers, it is useful to view what provides value to a group gratuity scheme. Its most important features are the following:

• Gratuity Liability Funding: Instead of providing a lump sum of money on an employee's departure, employers provide small, manageable payments over the long run.
• Professional Management of Funds: The gratuity fund is invested by the insurance company, and the company invests the money wisely to earn regular returns.
• Tax Efficiency: Contributions by employers to an approved gratuity fund are tax-deductible under Section 36(1)(v) of the Income Tax Act.
• Employee Retention Tool: A properly structured gratuity plan helps improve retention by creating another incentive for employees to stay long term.

Why Employers Ought to Offer a Group Gratuity Insurance Plan

For employers weighing the decision to switch from a self-administered gratuity scheme to a formal group scheme, there are strategic and cost benefits to look into. Here's why an employer should not lightly consider a group gratuity plan:

Planning and Predictability for Finance

The employer is freed from the shock of ad-hoc gratuity payments of large amounts. Contributions are paid year after year, and there is predictability in the budget and improved cash flow management.

Regulatory Compliance

Compliance with Payment of Gratuity Act is not voluntary but compulsory. A group gratuity scheme makes compliance with the law while protecting the employers from future claims.

Increased Employee Satisfaction

Offering a well-defined scheme of gratuity secures employees with the assurance that their long-term association is valued by the organisation. Knowing that there is a secure corpus accumulating for them brings confidence and psychological security, which can be translated to increased productivity and morale.

Tax advantages

Tax advantages are available to both the employees and employers. Employer contributions are tax-free, and even interest on the gratuity fund is tax-free if it comes under an approved scheme.

Flexibility and Customisation

The majority of group gratuity schemes are also flexible to the employer's requirements. Whether the contribution level, investment strategy, or insurance cover, companies are free to structure the scheme to their reward strategy.

A Strategic Turn to the Future of Work

With the evolving character of work, long-term fiscal health is uppermost in the minds of workers. Offering a group gratuity programme is, in this instance, less about a monetary transaction, it's a business strategy. Those companies that make the transition position themselves as progressive, people-focused companies that invest in people for the long haul.

Besides, these schemes also enhance employer branding. In a labour shortage environment, benefits like a formalised gratuity plan can be a differentiator that can attract and retain the best of the best. From the HR perspective, it is a differentiator that can be paired with other retention tools like employee stock options, performance-linked incentives, or upskilling allowances.

Also Read : what is Group Employee Benefits Insurance?

Conclusion: Win-Win for Employees and Employers

Essentially, an employee gratuity scheme is not merely about legislating, it's a financial planning tool, a mechanism for employee retention, and a sign of employer commitment. It provides the confidence that employees depart the organisation feeling secure and valued for the years that they have dedicated, and employers are financially set for the future liabilities.

Some of the established insurance players today have customisable group gratuity plans, and one must select the most suitable one for one's requirements. We at Niva Bupa have a history of employee benefit solutions and customer-oriented orientation to consider in planning such long-term liabilities.

In the long term, providing a group gratuity scheme is not a question of paying for gratuity, it's a question of creating a work culture that promotes security, planning, and concern. And for progressive organisations, that is the difference.

FAQ’s

1. Is the group gratuity insurance scheme mandatory for every employer in India?

No, a group gratuity insurance policy is not mandatory. However, companies who employ ten or more people are obligated to give gratuities to workers who are covered under the Payment of Gratuity Act of 1972. The group gratuity scheme is just a compliant and formal way of doing this in an economical way.

2. Who is responsible for funding a group gratuity scheme, the employee or employer?

Typically, the employer contributes to the group gratuity insurance scheme alone. The workers do not contribute to it. The gratuity is calculated on the basis of the last drawn salary of the employee and years of continuous service.

3. What happens to the gratuity fund if the employee retires before five years? 

Under Indian labour law today, gratuity is only payable in case an employee has been in continuous service for five or more years. If the employee leaves earlier, he/she is not entitled to any gratuity, and the equal fund contribution stays with the pool for other employees.

4. Can the employer withdraw or use the gratuity fund for any other business need? 

No, the gratuity fund is maintained in a different account and cannot be used for any other purpose. It is maintained in trust or with an insurer and is for the purpose of meeting gratuity liability as and when it occurs.