Taxation matters on Employer Employee Plan

 

Employer employee is not an insurance product per se infact it is an arrangement. At times, Employers wish to take insurance policies on the life of employees in order to use the insurance policy as a retention tool. This need can be met through the Employer-Employee schemes which have the following conditions agreed to by the Employer at the time of making the proposal:

 

1. Initially the employer is the Proposer and employee is the life assured. A specified period is decided generally a period of 3 to 5 years during which the Employer will be the policyholder and will pay premiums.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;

 

2. 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.

 

3. However if the Employee dies within the specified period, the policy proceeds will be paid to the nominees of the Employee appointed by him at the time of the proposal.

 

4. No withdrawals are generally be permitted to be made by the Employer.

 

5. The policy document once issued will be endorsed with the special conditions and dispatched to the employer.

 

6. The nomination request of the employee will be kept on record to be used at the time of a death claim.

Tax implications

 

 

For the Employer

1. Employer can claim the premium paid as a deductible expenditure under ‘Salaries & Wages’, the premium may be treated as a fringe benefit and taxed accordingly in the hands of the employer.

 

 

 

For the Employee

 

1. Since the Employee does not enjoy the benefits of the policy during the specified period, there could be no tax implications in respect of the premium paid by the Employer.

 

2. After the assignment, the policy takes the character of an individual policy and if the employer continues to pay the premium, such premium could be treated as a perquisite in the hands of the employee and taxed accordingly.

Please note that the above are my understanding of the current provisions of the Income Tax Act, 1961. Income Tax is the subject under the purview of the Central Board of Direct Taxes and only the Central Board of Direct Taxes can comment on the tax implications.

Thank you Sharma ji for your valuable insights into the matter.

My specific query is in case of the staff paying the premium on his own post assignment. In case; employer pays, it is clearly a perquisite but if the staff is to pay subsequent premiums, would the amount of premiums already paid by the employer on the assigned policy or any other amount being either the fund value or the surrender value of such policy be treated as a perquisite and made to be taxed as such?

In simple words; what is the treatment upon assignment of the insurance policy? Will it be considered as a benefit now to the employee in view of the policies being investment plans, and possible view of the taxman that this is a free of cost benefit?

Further; in such a plan is it possible to draw parallels with a key man insurance policy which is treated as a profit in lieu of salary upon assignment and the surrender value thereof is the taxable amount?

Can someone please provide some thoughts on the matter under the light of the IT Act or any judicial precedent?

Thanks!

• under this scheme there are two parts, plan A where the beneficiary is employer and plan B where the employee is beneficiary by virtue of nomination 
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• for more details pls visit 
• https://www.scribd.com/doc/8971386/Employer-Employee-Insurance-Plans-Final-Approved1

the same situation has arisen before me ? whether you have solution to this query (in present law)

 

Sharma ji .. Have a question on same topic? I had a meeting in Mumbai regarding employer - employer scheme option B . My client was ready to invest but his CA has refused this scheme and has given an answer to us that from first day premium will include in perquisite of employee. was he right? And why? After three year if assignment will be done in favour of employee than what will be the tax implications? After three year employee has paid the tax on surrender value and policy will be individual policy now and employee continue the policy ..? Can employee enjoy the 10 (10D) benefits on maturity?

One more question who will be the nominee?

Can a partner invest in employer employee scheme for tax deferral, firm has 3 partners having equal share and drawing salary from the firm. Please advice