Employer-Employee Insurance _ Tax benefits - Insurance Funda.pdf

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Employer-Employee Insurance | Tax bene ts
 May 28, 2019  Anish L J  327 Views  0 Comments  Employer-Employee Insurance
(Last Updated On: May 30, 2019)
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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.
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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-speci ed 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 bene t shall not be available for the employee on the premium paid
by the employer.

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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 nancial year.
Premium paid by the employer (after assignment) is treated as perquisite in
that nancial year and will be taxed accordingly.
Employee can claim Sec 80C bene ts 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 bene ts.
Death of the Employee: The death bene t has to be passed to the nominee of
the employee unless it is speci cally 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 bene t 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 pro t
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
pro t
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 bene t.
Death bene t 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
bene t
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 1 Crore
Plan Jeevan Labh Term/Premium Paying Term 21/15
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. 5,52,027
Net Profit Rs. 1,00,00,000 Rs.9447973
Tax @ 25% on profit Rs. 25,00,000 Rs. 23,61,993
Surcharge @ 7% on tax Rs. 1,75,000 Rs.1,65,339
Educational cess @ 4% Rs.1,07,000 Rs.1,01,093

Total Tax Liability Rs.27,82,000 Rs.26,28,426
Profit in terms of Divident Distribution Tax (if applicable)
Net Profit Rs. 72,18,000 Rs. 68,19,547
Dividend Distribution Tax @
17.65%
Rs.12,73,977 Rs.12,03,650
Total Out Go Rs.40,55,977 Rs. 38,32,076
Net profit per year Rs.2,23,900
Total profit in 15 Years Rs. 33,58,500
Thus by applying this logic a private limited company can increase the profit
by Rs 33,58,500 in 15 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
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.

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