Employer-Employee Insurance | Tax benefits
Employer Employee Insurance is a unique opportunity for the employer to reward his employee and get benefited at the same time. In the Employer-Employee insurance arrangement, both the employer, as well as the employee, are benefited at the same time.
This post is primarily intended to give a comprehensive idea on the tax implications of the employer employee insurance arrangement. It is recommended to read the article Employer Employee Insurance – How to get benefited before reading this post.
Employer-Employee Insurance - How it works?
- The employer purchases an insurance policy for the employee in either of the two arrangements given below.
- Type A – Employer is the proposer and Employee is the life assured.
- Type B – Employee is the proposer and life assured.
- The premium is paid by the employer in type A until the policy is assigned to the employee (usually within a pre-specified period).
- The employer can continue the premium payment even after the assignment, if he wishes. Otherwise, the premium payment has to be continued by the employee.
- The maturity amount and death claim shall be available to the employee/nominee, if the policy has been assigned to the employee by the employer.
- As the employer does not have any control over the situation in type B arrangement, usually type A is the preferred employer-employee insurance arrangement.
Tax implications on the premium paid - Employer-Employee Insurance
Before Assignment
- Employer is the absolute owner of the policy.
- Premium paid are deductible expense of the company u/s 37(1) of IT act.
- Sec 80 C benefit shall not be available for the employee on the premium paid by the employer.
On/After Assignment to Employee
- Employee is the owner of the policy.
- The sum total of the premium paid by the employer before assignment is treated as perquisite as per section 17(2) (V) of the IT Act and will be added to the taxable income of the employee in that financial year.
- Premium paid by the employer (after assignment) is treated as perquisite in that financial year and will be taxed accordingly.
- Employee can claim Sec 80C benefits even if the premium are paid by the employer.
In short, the premium paid by the employer can be deducted from the profits of the company, as it is considered as the business expenses of the company, which in turn reduces the tax liability also. On the other hand, the employee claims the premium paid (after assignment) under section 80 C and get benefited.
Employer-Employee Insurance - How to treat various situations
Before Assignment
- Employee quits the job: Employer can either surrender the policy and get the surrender value or absolutely assign the policy to the employee as a part of his terminal benefits.
- Death of the Employee: The death benefit has to be passed to the nominee of the employee unless it is specifically mentioned in the agreement.
- Policy matures without being assigned to employee: Maturity proceedings shall be received by the company but will be treated as the income of the company and will be taxed and TDS will be applicable.
On/After Assignment to Employee
- Employee quits the job: Employee is the owner of the policy and he should pay the future premiums(if any) and can enjoy the maturity proceedings. Maturity amount will be tax free u/s 10(10D) of IT Act.
- Death of the employee: Death benefit amount shall be available to the nominee of the employee only and will be tax free u/s 10(10)D.
- Policy Matures: Maturity amount received by the employee and is fully tax free u/s 10(10D).
Central Board of Direct Taxes (CBDT) has vide circular no. 762 dated February 18, 1998, mentioned that the surrender value of the policy, endorsed in favor of the employee would be taxable in the hands of the employee as ‘profit in lieu of salary’.
But the learned opinion of tax firms like Price Water House Coopers is that the aforementioned circular is applicable only for Key Man insurance and in Employer-Employee insurance, total Premium paid by the employer will be applicable. Insurance policy is a ‘movable asset’ and the rules applicable will be that of transfer of movable assets where the expenditure incurred by the employer is applicable.
Ernst and Young in their opinion about the scheme have clearly mentioned that maturity and death proceedings of an e-e policy where the assignment has not been done will attract TDS under section 194DA of IT act. TDS at the rate of 1% on the taxable component has to be deducted before disbursing the maturity proceeds to the employer.
Tax deferment - strategy for profit making companies
As shown in the info-gram, profit cannot be carry forwarded and will attract tax. No need to add that paid tax is lost forever.
Think of a situation where a profit-making private limited company can defer the tax payment perpetually forever…
Employer-Employee insurance provides such an opportunity.
Perpetual tax deferment - Strategy
Company takes a policy for its director(s) under employer- employee.
Premium paid is treated as business expenses of the company u/s 37(1) of Income Tax Act and the company need not pay tax on it.
No Assignment – As long as the policy is not assigned, no perquisite for the life assured and the director/employee is not taxed for perquisites.
As assignment is not done, maturity amount goes to the company. The maturity amount will be considered as business income and the company will have to pay tax on the maturity amount.
In order to defer the tax liability, company can take a new insurance policy in the name of the director itself in single premium mode, using the maturity amount. As new premium paid is considered as the business expense of the company, no tax liability will be there.
Future of the company - possibilities
Possibility 1 - Company continues to make profit
- Tax liability is postponed till maturity.
- Tax liability can be postponed again by purchasing a new policy.
Possibility 2 - Company makes losses
- Maturity can be used to set off losses.
- Get surrender value if situation is worse.
- Make the policy paid up and get paid up value at maturity and set off losses.
Possibility 3 - Director of the company dies
- Company gets the death benefit.
- Death benefit will be considerably higher than the total premium paid.
- Tax liability can be born by the company from the maturity amount.
Employer-Employee -Example of benefit
Let us consider an example where a private limited company takes an insurance policy with following plan details under E-E scheme.
| Plan details for the example considered | |||
| Age | 35 | Sum Assured | 5 Crore |
| Plan | Jeevan Shiromani | Term/Premium Paying Term | 20/16 |
| Employer-Employee -Tax Benefit Example | ||
| Calculation without policy | Calculation with Employer- Employee Policy | |
| Total profit of the company(assumed) | Rs. 1,00,00,000 | Rs. 1,00,00,000 |
| Premium Paid for E-E scheme | Rs. 36,07,840 | |
| Net Profit | Rs. 1,00,00,000 | Rs.63,92,160 |
| Tax @ 25% on profit | Rs. 25,00,000 | Rs. 15,98,040 |
| Surcharge @ 7% on tax | Rs. 1,75,000 | Rs.1,11,863, |
| Educational cess @ 4% | Rs.1,07,000 | Rs.63,922 |
| Total Tax Liability | Rs.27,82,000 | Rs.17,73,825 |
| Total Out Go | Rs.27,82,000 | Rs.17,73,825 |
| Net profit per year | Rs.10,08,175 | |
| Total Benefit in 16 years | 10,08,175 X 16 | Rs.1,61,30,800 |
| Benefits Payable on Maturity | ||
| Survival Benefit on 16th Year | 45 % of Sum Assured | Rs.2,25,00,000 |
| Survival Benefit on 18th Year | 45 % of Sum Assured | Rs.2,25,00,000 |
| Matuirty Benefit on 20th Year | 10 % of Sum Assured+ GA +LA* | Rs.6,72,50,000 |
| Total Matuirty Benefit | SB X 2 + Maturity | Rs.11,22,50,000 |
| Grand Total Benefit | EE Benefit+Matuirty benefit | Rs.12,83,80,800 |
Thus by applying this logic a private limited company can increase the profit by Rs. 12,83,80,800 in 20 years.
If you have any queries in this regard feel free to use the comment section below.
Note: The examples shown above are as per the interpretations of the existing tax laws and can vary in the future. Please consult your accountant before taking decisions.
Anish L J is a ‘Financial Planner’ and member of Chartered Insurance Institute(CII), London and Insurance Institute of India. He is also a finance, insurance and software consultant. He thoroughly follows the developments in finance, insurance, and other related sectors.
For example there are 4 Directors in a PVT limited concern. 3 are from the family of Life assured. The total shareholding of these 3 directors are @ 75% . Can we offer Employer Employee scheme
You can give an employer-employee scheme for the fourth director but not for the other three.
I didn’t understand the DDT calculation….One more scenario where let say EE buys traditional policy and it assign after 5 years …Tax implications for the employee will be on premium paid or surrendered value which is at the time of assignment.
Can you elaborate on your doubt, so that I can try to clear it. Tax implications are on the total premium only .. and is treated as perquisites and taxed accordingly..
Hello sir..,
My name is Ankita
I want to ask you about Employer employee death claim terms and conditions in private companies by private insurance
Is employer employee insurance also cover the death of the employee by liver cirrhosis
Due to alcohol
Please reply me as soon as possible
it’s very important for me and my family
Thank you
Insurance companies treat all claims including employer employee scheme in the same way.
If liver chirosis started after taking the policy then the company will have to give the claim..
But if it was diagnosed before taking the policy, there is a chance to repudiate the claim.. if you require further information let me know..
Hi,
Employer employee article says policy maturity in hands of employee post assignment is tax free u/s 10(10 D) but as per my knowledge it is always taxable as per prevailing rates. Its a tax deferment tool so some one has to pay tax either company or individual as the case may be.
Please note that the employer-employee scheme is different from Keyman insurance and don’t confuse between them. In e-e Insurance as per my knowledge the maturity amount is tax-free in the hands of the employee (post assignment). If you have come across any document going against it, please send it to admin@insurancefunda.in so that I can look into it.
Sir,
Suppose after 4 years of premium payment, Company assigned policy to Employee. On Assignment surrender Value is taxable as a perquisite in the hands of Employee. Policy is further continue for five more years.
Now if surrender value is less than the premium paid by Company How it will be taxed. ?
Secondly Could last 4 years premium is treated as a income in the hands of Employee under Profit in lieu of Salary ?
On Maturity in will not taxed in the hands of Employee, now the policy is linked with ULIP and Maturity value received higher than the Surrender Value at the time of Assignment + Insurance premeium paid by Employee, Under circumstance what will be the taxed effect. ?
Your question is not very clear to me. I shall answer based on my understanding of the question.
Taxation is done based on the value at the time of the assignment. The value change after that is not considered.
Total premium paid till the time of assignment is treated as perks in the hands of the employee and is added to the income in the year of assignment.
It is the total premium paid and not the surrender value that is taken to the account.
Hello Sir,
I have a couple of questions.
1. If the company is family owned by 2 sons and a father, can we provide EE scheme to them. What if in future, sons will become 50% shareholders, will the maturity be disallowed.
2. Can GST be claimed in EE scheme paid premiums by the organisation.
E-E scheme is not eligible as the combined shareholding of all relatives exceeds 51%. GST can be claimed in insurance policies if the premium is paid by the company and it is approved by the authority as used for business purposes. (One can claim Input Tax Credit only if the goods and services received is used for business purposes.)
Hi Sir,
Thank you for this article were very Insightful..Many people have similar doubt which i am going to place so it will help society at large
1) As per your Q & A When Policy is assigned tax would be applicable on Total Premium paid but as per general confusion In Endowment Plan Guaranteed Surrender Value should be taxed request your clarification on this
2) After Assignment to Employee The Maturity amount is Tax-Free under section 10 10(D) kindly clearify
Hi Mahesh,
1)Surrender Value is an internal calculation of an insurance policy and is not available for calculations and verifications to the income tax authority. So naturally and logically income tax calculation cannot be on the basis of the surrender value. It is clearly mentioned in the income tax acts that income considered will be on the total premium paid only. I have not come across any document mentioning that the surrender value will be taken for taxation. If you have any such document please send it to admin@insurancefunda.in.
2) After the assignment, the policy is treated as a normal policy as far as section 10(10D) is concerned. The reason is that the Policyholder has already paid the tax for the portion of the premium paid by the employer and the remaining premium is paid by him only.
If you require any more clarifications please let me know.
Hello Anish,
This is a really helpful article. Thanks for the detailed explanation. I have a some questions based on the details provided above.
1) While showing the difference between “before and after assignment”, it is mentioned that in both case the death benefit will go the the nominee (unless it is specifically mentioned in the agreement in case of before assignment). But in the later explanation it is mentioned under “Possibility 3 – Director of the company dies”, that the Company gets the death benefit. It seems contradictory to me. Please correct me if I am misinterpreting.
2) From above question if in both cases the death benefit goes to the nominee then will it be tax free u/s 10(10)D for before assignment as it is there in case of after assignment? It is not mentioned for before assignment.
3) If company takes policy for directors with 5 years premiums and 85 years cover, is it necessary to assign the policy to directors after 5 years? If yes, as the premiums are already paid will there be any other cost to directors/employee’s apart from paying tax on the premiums? To be particular, will there be any additional premiums? Based on first question if nominee of the directors/employee will be the one to get death benefit even before the assignment then the company can defer the tax forever. You mentioned it in one sentence at last (Think of a situation where a profit-making private limited company can defer the tax payment perpetually forever…) but it was not clear to me that whether it is legal or not.
Thanks,
Jay
Hi Jay Manvar,
(1)If the death occurs before an assignment the claim amount will be paid to the company only by the insurer. But ethically the claim amount has to be passed to the nominee of the employee (as an ex gratia payment) but the company can decide on keeping it or passing it to the nominee.
(2) If the death amount is passed to the nominee it will become exempted under section 10(10D) and if the company decides to keep it with them they will have to pay tax on the death claim amount.
(3)Ideally, the policy will have to be assigned to the directors or the employee as the case may be after the premium liability is over. Apart from tax no other cost or liability will be there. Legally tax deferment forever is possible as per the existing rules. But ethically it will not serve the purpose of the employer-employee scheme.
In case policy is assigned to a specific employee, does Employee need to pat tax on the difference between the surrender value and premium paid?
or the whole amount of surrender value will treated as perks?
Surrender value is an internal calculation of the insurance company and the income tax department is not bothered about this figure. The tax to be paid is calculated on the premium paid only.
Hi Anish ,
Whether the E/E policy can be taken by a Partnership firm on the life of a working partner who is not related to other partners and his stake is less than 49% . This Partner is actually running the business while the other partners are just capital contributor .
whether the Business can claim deduction of premium paid on the life of working partner ( as it is allowed for a Director in the case of Pvt Ltd Co whose stake is less than 51% ) under section 37(1) of the Income Tax Act, 1961.
Would the answer be different , if the Insured is an employee and his name is not there in the Partnership Deed.
If the stake is less than 51% and he is not related to other partners, then he can be benefitted by the e-e scheme. And premium paid can be considered as business expenses also. There is no difference between employees and directors on the benefits of the employer-employee scheme.
Hi Ashish
If in case Policy has been assigned by Company to Employee and Last premium is paid by Employee.
Then whether 10 10(D) will be applicable or not.
If we presume that Sum assure is more than 10 times of Premium
If the policy has been assigned to the employee, it will be eligible for section 10(10D) exemption.
Hello Sir,
Our company is a public unlisted company & closely held by the directors (100% share holding in the company) .
Can we take the E-E Scheme insurance for our directors. What is the tax applicablity if we take the scheme.
It depends on the shareholding percentage of the particular director with whom the e-e scheme is proposed.
Sir,in case of assignment,,the tax needs to be on the surrender value as of that date.
The tax is to be paid at slab rates as the same is considered as perquisites 17(2) in the hands of the employee
Surrender value is an internal value available only for the insurance company. The income tax department will not accept a value that is not normally available to them. Further nowhere in income tax rules, there is a mention of surrender value as far as my knowledge is concerned. While considering perks they will go for the premium paid only.
In case of a Term Plan, there is no surrender value. Policy is payable only in case of death of the insured. If a company takes e-e Term Plan policy till the age of 100 years of employees, and at the time of retirement of an employee (or otherwise any time) assigns the same, there being no surrender value, the policy continuing only in case of regular payment of premium every year being a Term Plan, will there be any different treatment under Income Tax Act?
There is no difference in the treatment of the plan with respect to the return pattern of the plan. In other words, the income tax authority has not mentioned about type of policies and its return pattern in income tax rules related to the employer-employee scheme.
Hi Sir
This article is very meaningful & informative.
Thanks for adding value to us.
I request you to give answer to my one question that is ” Maturity is taxable if assignment is not done in policy but if company makes losses on maturity years than what is tax implications on maturity ??
Let’s suppose A company paid 5 lacs per annum for 5 years under EE scheme & after 15 years he will be getting of RS 50 lacs.
At 15th year company got losses of 50 lacs than
Loss of firm will written from maturity bene1fits but there is no profit no loss for that year.
Amount recieved from policy is taxable or not ??
The maturity benefit received, in this case, is added to the income of the company. The taxability of the amount will depend on the profit or loss of the company in that particular year.
Means to says after adding the maturity value to losses; still firm P & L account is showing zero profit zero loss than that time tax would be zero as their is no profit at particular year.
Exactly.
There is a strong view that there was confusion about tax implications. Even after assignment the policy remains the same and 10(10D) is not applicable. The maturity or death benefit are taxable. Most of the insurance companies are training their staff on this view. Many CAs are also of the same view what do you say ??
Hi Brajesh,
Once assignment has been done in favor of the employee, the policy will enjoy all tax benefits as a normal insurance policy. I think there is no need of any confusion in that.
If it is single premium policy and premium is more than 10% of policy amount which is assigned post premium payment then on maturity whether 10(10D) benefit would be available? I believe it would not eb tax free.
If the premium is more than 10 % of the sum assured, naturally section 10(10D) benefits will not be applicable even if the policy is taken under the employer-employee scheme.
That’s the best article i have come across on the subject . i need more clarity on it if you can help. Example – if the Director takes this policy in his name under EE scheme for 22 Years . The Assignment forms that are attached along with the policy make it mandatory that policy has to be assigned beofre the last day of the policy maturity , so that maturity comes in hand of the Employee only and not the Employer !! In the article above it is mentioned that “there can be no assignment” . how is that possible ?Since its EE , Assignment is mandatory . please throw some more light how can there be no assignment or how can the maturity amount come under the books of the company and not the individual. Request Urgent revert if possible
hello sir ,
if policy assign in 4 th year and surrender value is zero then any tax liability on employee ?
Tax liability is based on premium paid and not on basis of surrender value.
Is it possible to take e-e policy without assignment
Yes, it is possible.
Employer buys a policy where ppt is 10 years and after 5 years employer assigns this policy to employee how taxation will be done for both
Please read the article it is clearly mentioned in this article.
What is the definition of family of an employee on whose life Policy is proposed.
Is it Employee, his spouse and kids. This question is in relation to Share holding pattern which has to be disclosed with the proposal form.
The family includes parents children and spouse.
If the policy has not been assigned and the yearly survival benefits start coming in. Then are those survival benefits taxable in the hands of the company which otherwise would be tax-free as advertised by insurance company.
if it is not assigned section 10 (10D) won’t be applicable.