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 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 share holding 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 employer
- Employee will feel to be more secured and honoured and naturally, the loyalty to the employer is enhanced.
- Employer is entitled to get exemptions for 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.
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 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 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 perqs 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.)|
|How the employer is benefited even if there is a tax liability of 39,00,000|
|Let us consider the situation
in the absence of the employer
employee insurance scheme
|Profit of the company would have increased by Rs. 1,30,00,000|
|Tax @ 25% = 32,50,000|
|Surcharge @ 5% = 6,50,000|
|Educational Cess@3% on Tax+Surcharge = 1,17,000|
|Tax Liability = 40,17,000|
|Increase in Net Profit = 1,30,00,000 – 40,17,000 = 89,83,000|
|If 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 40,17,000)
|Total Tax liability =40,17,000 + 17,96,600 = 58,13,600|
|On 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 Year)|
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 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.
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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