Employer-Employee Insurance Scheme is an insurance arrangement between the two, 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 spouse, children, in-laws, parents, siblings etc. in the employer company should not exceed 51 %.
- 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.
Employer-Employee insurance 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 income tax act.
- Death claim, if any, shall be paid to the nominee, nominated by the employee.
Employer-Employee 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.
- 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.
Employer-Employee Insurance – Two types of arrangements possible.
Two types of Employer-Employer 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.
Corporate Tax Rate for Domestic Companies in India
- A flat rate of 25% corporate tax is levied on the income earned by a domestic
- A surcharge of 5% is levied in case the turnover of a company is more than Rs.1 Crore for a specific financial year.
- 3% educational cess is levied on the tax.
|Employer-Employee insurance scheme – Example of benefits|
|Let the premium of the policy taken under Employee scheme be 1 crore|
|Premium paid by the employer is treated as perks to 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.)|
in the absence of the employer
employee insurance schemeProfit of the company would have increased by Rs. 1,30,00,000Tax @ 25% = 32,50,000Surcharge @ 5% = 6,50,000Educational Cess@3% on Tax+Surcharge = 1,17,000Tax Liability = 40,17,000Increase in Net Profit = 1,30,00,000 – 40,17,000 = 89,83,000If the company declares
this amt as dividend, again
dividend distribution tax @ 20 %
(including surcharge) is payable.Tax liability on dividend distribution = 17,96,600
(20% of 89,83,000)Total Tax liability =40,17,000 + 17,96,600 = 58,13,600On the other hand if employer employee insurance policy is taken, only Rs 39,00,000 has to be paid.Nett Benefit on tax payment = 58,13,600 – 39,00,000 = Rs 19,13,600 (Per YeaEmployer-Employee
Employer-Employee Insurance scheme – Important points to remember
- Either the employer or Employee can be the proposer of the policy.
- If 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 Income Tax AcEmployer-Employee
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.
Employer Employee 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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