At Insurance Samadhan, we frequently receive complaints related to Employer Employee
Insurance. Most of these complaints are a result of misleading and incorrect interpretations of income tax laws.
Checklist for understanding Employer Employee insurance
We have attempted to create a checklist for understanding Employer Employee insurance, as
- Employers have an insurable interest in their employees; thus, they can purchase insurance on the lives of their employees. This makes the Employer Employee contract valid. Employers can act as proposers, while employees are life insured. Premiums can be paid by the employer and treated as an expense under section 24.
- This contract must be supported by a Board Resolution and a Scheme Document that outlines all the details regarding the purpose of the arrangement and the action plan in various situations. A lack of proper Resolution and Scheme Document can lead to disputes between employers and employees.
- However, the treatment of the premium paid remains ambiguous. Most Chartered Accountants consider it a perquisite, while insurance sellers argue that it should not be treated as such. We believe it should be considered a contingent liability since the gain is not immediate and is in the form of a future benefit. Therefore, the premium paid should not be treated as a perquisite. We recommend that employers consult their Chartered Accountant before opting for Employer Employee Insurance, and it can be contested by the CA if they are willing.
- Another area of ambiguity is the taxation of maturity proceeds. If it has been classified as a perquisite, then the proceeds will be tax-free under section 10(10) D. However, if it is not treated as a perquisite, the proceeds will be taxable.
- There is clarity regarding the tax-free nature of death proceeds under all circumstances. However, the Scheme Document should specify that death proceeds will be paid to the nominee of the insured after deducting any liabilities to the employer. It is advisable for the insured to have a loan liability to validate the contingent liability.
- Insurance sellers also present an option for assigning the policy to the employee after benefiting from the surrender value. For example, if the premium is Rs 1 Lakh per year, and after three years, the employer has claimed an expense of Rs 3 lakh, but the surrender value is only Rs 1.50 lakh, the employee can buy the policy by paying Rs 1.50 lakh and become the owner of the policy. Post-assignment, all benefits are treated as those of a regular policy. This is presented as a tax-efficient method of wealth creation, especially for owners or promoters who receive salaries as employees.
- Insurance Samadhan recommends conducting due diligence on the Scheme Document, Board Resolution, loan liability, and creating a fund for the long-term retention of employees.
Always consult your Chartered Accountant before considering the concept of Employer Employee insurance.
By – Shailesh Kumar
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