Employer-Employee Insurance Scheme is an insurance arrangement between the employer and employee, where, the employer purchases an insurance policy for the employee. This arrangement is based on the principle that the employer has an insurable interest in his/her employees. The interesting fact is that both the employee and the employer is benefited through this arrangement.
How is it possible? let us have a detailed look.
Employer-Employee insurance scheme – who is eligible?
- Combined shareholding of the employee and his or her relatives such as a spouse, children, in-laws, parents, siblings, etc. in the employer company should not exceed 51 %.
- There should be a relationship between employer and employee as the employee earns a salary for his services provided to the employer.
- Any company, Partnership firm, or even proprietary concern shall be eligible for taking insurance for their employees under this scheme.
- Even a loss-making company can get the benefit of this scheme.
- All plans and all modes are allowed for this scheme.
E-E Insurance scheme – benefits to the employer
- The employee will feel to be more secured and honored and naturally, the loyalty to the employer is enhanced.
- It helps to minimize employee attrition rate.
- The employer is entitled to get exemptions for the premium amount (whether it is under single or non-single mode) u/s 37(1) of Income Tax act as business expenses of the firm.
- Exemption u/s 37(1) can bring monetary benefits to the company.
Section 37(1) of Income Tax Act – Important points to remember
The deductions are to be allowed in respect of those expenses which shall satisfy the following conditions :
- The expenditure should not be of the type of expenses already covered under sections 30 to 36 of this Act.
- Expenses should have been incurred in the relevant accounting year.
- Expenses should be in respect of the business carried on by the assessee and the profits of which are to be computed and assessed and should be incurred after the business is set up.
- Expenses should not be in the nature of the personal expenses of the assessee.
- The expenses should have been incurred totally and exclusively for the purposes of the business of the assessee.
- Expenses are not of capital nature.
- The expenses are incidental to the business of the assessee and directly spring from the carrying on of it.
E E scheme -Benefits to the employees
- This scheme works as a reward programme for employees and helps in raising their morale.
- Even though the premium amount is paid by his employer, the employee can claim income tax exemption u/s 80C.
- Maturity proceeds will be available to the employee only.
- Entire maturity proceeding will be tax-free u/s 10(10D) of the income tax act.
- Insurance policy can be selected in such a way that it provides security to the employees against illness, accident/disabilities and early death.
- Death claim, if any, shall be paid to the nominee, nominated by the employee.
Two types of arrangements possible.
Two types of E-E insurance arrangements are possible.
- Type A – The employer is the proposer and employee is the Life Assured
- Type B – The Employee is the proposer and Life Assured
In these two situations, the contract will work in two different methods. Let us have a detailed look at it.
Type A – Employer is the proposer and Employee the Life Assured
- Proposal form for another life has to be used. In the case of LIC, form number 340 has to be used.
- The policy shall be assigned to the life assured (employee) as per an agreement between the Employer and Employee.
- The proposal should be signed by a person authorized by resolution.
- A separate letter mentioning the ‘object of insurance’ and the ‘restrictions’ the employer desires to impose has to be obtained.
- Book of Accounts or IT orders for the last 3 years of the company to prove the profitability. (As the premium liability lies with the company).
- The Employer should undertake to assign the policy to the Employee absolutely upon the Employee continuing to remain in employment with the Company for a period specified by the Employer.Usual period is around 3 to 5 years.
- The company can impose restrictions on the employee to prevent him from surrendering or taking loan from the policy.
The employer can continue to pay premium even after the prefixed ownership period and avail the tax benefits. If the Employee quits the job within the specified period, the Employer can either surrender the policy for its surrender value to the insurance company or absolutely assign the policy to the employee as a part of the terminal benefits.
Type B – The Employee is the proposer and Life Assured
- Proposal for own life has to be used (in case of LIC form number 300 is used)
- No need of assignment of the policy from the employer.
- Employee is the owner of the policy without any restrictions.
|Employer-Employee insurance scheme – Example of benefits|
|Let the premium of the policy taken under Employee scheme be 1 crore|
|Premium of 1,00,00,000 paid by the employer on behalf of the employee||Premium paid by the employer is treated as perks to the employee|
|Employer can pay income tax on behalf of the employer u/s 192(1A) on the perks of the employee||Rs 1 crore as perqs U/S 17 (2) V of income tax act will attract a tax of 30,00,000 @ 30 %|
|Tax on the tax paid (Rs. 30,00,000) will also become the liability of the company. The company will have to pay an additional tax of 9,00,000 on the tax paid along with 30,00,000 tax.|
|So the total tax liability of the company will be Rs. 39,00,000.||(Employee can claim IT rebate u/s 80C on the premium paid if required.)|
Corporate Tax Rate for Domestic Companies in India
- A flat rate of 25% corporate tax is levied on the income earned by a domestic corporate.
- A surcharge of 7% is levied in case the turnover of a company is more than Rs.1 Crore for a specific financial year but less than 10 crores. If income is greater than 10 crores the surcharge will be 12%.
- 3% educational cess is levied on the tax.
How the employer is benefited even if there is a tax liability
Let us consider the situation in the absence of the E-E insurance scheme
Profit of the company would have increased by Rs. 1,30,00,000
|Tax on 1,30,000||@ 25 %||32,50,000|
|Surcharge||@ 7% (12% If income more than 10 Crores)||2,27,500|
|Educational cess||@ 4% on Tax+Surcharge||1,39,100|
|Tax Liability||32,50,000 + 2,27,500 + 1,39,100||36,16,600|
Increase in Net Profit
|1,30,00,000 – 36,16,600||93,83,400|
|Dividend Distribution Tax on Net Profit||@ 17.65% of 93,83,400||18,76,680|
|Total Tax liability||36,16,600 + 16,56,170||52,72,770|
|Nett Benefit on tax payment =||52,72,770 – 39,00,000||Rs 13,72,770 (Per Year)|
On the other hand, if the employer-employee insurance policy is taken, only Rs 39,00,000 has to be paid. Nett Benefit on tax payment = 52,72,770 – 39,00,000 = Rs 13,72,770 (Per Year)
Employer-Employee Insurance scheme – Important points to remember
- Either the employer or Employee can be the proposer of the policy.
- If the employer is the proposer, the policy should be assigned to the employee within a reasonable period of time.
- Maximum Sum Assured will depend on the financial underwriting rules and existing insurance on the life of the employee.
- Maturity amount will be tax-free u/s 10(10D) of the Income Tax Act
Employer-Employee Scheme Vs Key man Insurance
It is natural to confuse employer-employee insurance with key man. Even though in both cases employer purchase a policy on employee, the two are very different. In key man insurance, one can only purchase term life cover. On the other hand employer-employee structures can be used for any kind of insurances.
In key man the insurance benefit on death is paid to the company and is subject to income tax. However, in employer-employee scheme the benefit is paid to the employee and is tax free.
E-E Scheme from LIC of India
Form number 340 or 300 has to be used respectively for the employer or employee being the proposer of the scheme. If form number 340 is being used the policy will have to be assigned in favour the employee within a reasonable period.
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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.