28 February 2008
Sub: Tax Treatment of Keyman Insurance Policy
We seek your advice on the above refer subject in respect of Tax implications in the case of Company/Individual etc.
FACTS OF THE CASE:
Highway Industries Limited has taken out a Keyman Insurance Policy in the name of Managing Director Sh.Umesh Munjal w.e.f 01-04-1994 and yearly premium of Rs.5.94 Lacs is being paid to L I C. This amount is being claimed as expenditure in the books of accounts of the Company. As we understand, as per the Current Income Tax Provisions the whole amount of the Policy as and when received in the hands of the Company will be taxable in the year of receipt.
Present surrender value of the Policy is appx. Rs.75 Lacs.
An Insurance Consultant has suggested the followings:
The company assigns the assurance policy in the name of the Managing Director by passing a Board Resolution. No gift Tax will be payable by the Company on such transfer and the Managing Director will be liable to pay Income Tax on the surrender value of the Policy treating it as his Income. After assigning the Policy, in future onwards the Managing Director will pay the premium for the remaining period of the Policy which is about 2-3 years in our case. The Managing Director will get the maturity value from the L I C in his own name. The insurance adviser has stated that on the assignment of the Policy and the subsequent premium payment made by the assured will change the character of the policy and it will not be treated as Keyman Insurance Policy and the maturity value received in the hands of the Managing Director will be Tax Free.
We want your opinion and guidance on the above referred matters on the following points:
1) Whether as per Company Law is it possible to assign the policy to Managing Director by simply passing a Board Resolution or does it require any Shareholder Resolution or any Govt. Approval for the same as it entail a benefit of appx.Rs.75 Lacs to the Managing Director on the date of assignment but in the next two years the premium paid by the Managing Director will be Rs.12 Lacs against which he would get a maturity value of Rs.2.5 Crores.
2) Whether the amount received by the Managing Director will be Tax Free Income or whether it will be treated as taxable income in his Individual hands.
Please clarify whether TDS is to be deducted on amount exclusive of Service Tax/Vat or Inclusive Service Tax/Vat. in case of payment made to Parties from whom we are getting the work done
Value of Contract Rs.100000/-
Service Tax @ 12.36% Rs. 12360/-
Vat @ 4% Rs. 4494/-
Whether TDS is to be deducted on Rs.100000/- or Rs.116854/-
29 February 2008
I query: The suurender value will be remuneration and therefore section 269 and connected sections dealing with remuneration will apply.
If the policy, after attaining surrender value, is endorsed to the employee, then the surrender value/maturity value is chargeable to tax under Section 17 of the Income Tax Act. This is because it is treated as 'profit in lieu of salary' in the hands of the employee.
However, in case the policy has been assigned to the keyman and the keyman is paying the premiums, then the claim/maturity proceeds are exempt under Section 10 (10D).
II query: TDS shall be on total value including service tax and VAT