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
- 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
- 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.