A Keyman insurance
Policy, of the Life Insurance Corporation of India, etc. provides for an
insurance policy taken by a business organisation or a professional
organisation on the life of an employee, in order to protect the business
against the financial loss, which may occur from the employee’s premature
death.
Keyman insurance is
an insurance taken by a company/firm on the life of an employee/ partner
(keyman), whose services contribute substantially to the success of the
business of the company/firm. The object of the keyman insurance is to cover
the life of a Keyman for a monetary value so that on death of such keyman, the
loss to the firm is recouped with monetary assistance (insured amount) received
from the insurance company.
Who
can be a Keyman?
Keyman is individual whose skills, knowledge, experience or
leadership are important to a business’ continued financial success. The “Keyman” is an employee or a director, whose services are
perceived to have a significant effect on the profitability of the business. Generally a keyman could be a CEO, CIO,
Chairman, MD, Directors or a key management person. But as there are several
such one-man run companies across the world and there it is vital for companies
to cover the single most important employee to hedge against any financial loss
due to death of this keyman. Further anybody with specialized skills,
whose loss can cause a financial strain to the company are eligible for Keyman
Insurance. For example, they could be:
(i)
Chairman,
Managing Director, Directors of a Company; or
(ii)
Key Sales People; or
(iii)
Key Project Managers; or
(iv)
People with Specific Skills
(v)
Partner
of a firm
Taxability of receipts under a keyman Insurance Policy in the hands of
company/firm, in the hands of keyman and in the hands of third persons are
tabulated as under:-
S. No.
|
Particulars
|
Tax treatment
|
(i)
|
Any company or a firm buying keyman
insurance for its employee
|
can claim a deduction for the
premium paid for the policy as a business expense under Section 37(1) of the
Income Tax Act. In other words, the
premium paid on the Keyman Insurance Policy is allowed as business
expenditure.
|
(ii)
|
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.
|
Taxation of a sum
received under the keyman insurance policy ( i.e. Tax Liability at the time of Maturity)
Tax liability at the time of
maturity of keyman insurance policy depends on the person in whose hands it’s
matured.
|
||
(iii)
|
Employer
|
Any amount received under a Keyman Insurance Policy either on
maturity of the policy or due to death of Keyman is taxable under section 28 of the Act under
the head “Profits and Gains from Business or Profession”.
|
(iv)
|
Keyman
(Employee)
If Keyman insurance policy has matured in the hands of
employee
|
(i) In case the proceeds of Keyman Insurance
Policy are received by the employee,
Ø the same will be
taxable as salary in the year of receipt as it is a part of “Profits in liew
of Salary”.
(ii) During the continuance of the policy, if the
same is assigned to the employee,
Ø then the surrender
value of the policy would be taxable in the hands of employee in the year of
assignment.
(iii) If the employer continues to pay premium on
the policy even assignment theeof to employee,
Ø the amount of
premium so paid will be taxable as perquisite in the hands of the employee.
|
(v)
|
Third Party (say legal heirs of Keyman)
|
Any amount received by a third
party with whom the employer does not have any employer-employee relationship
under a Keyman Insurance Policy, the same amount will be chargeable to tax under section
56 of the Act under the head “Income from Other Sources”.
|
·
KEY NOTE
v
The amount on claim or maturity under
a keyman insurance policy is not exempt under Section 10 (10D) of the Income
Tax Act if the company is paying the premiums. 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).
v As
premiums are paid by the company, no tax benefit is offered to a key man. In
case the policy is assigned to a key man, he/she can decide nominee of the
policy. Consequently, in case of death of the insured during the policy tenure,
his/her dependents would get death benefits which would be tax-free as per the
Income Tax Act.
Premium paid on 'Keyman Insurance Policy' taken for benefit of
directors and senior staff is allowable expenditure.
Dismissing the appeal
of the revenue, the Tribunal held that; payment towards insurance premium
under keyman policy was for protection of assessee's company from any risk that
it may sustain by losing valuable services of their directors and its senior
staff from any eventuality by any accident or death, it was an expenditure
which was incurred wholly and exclusively for purposes of business, hence
allowable. (Related Assessment year
2009-10)
[ITO v. Marcopolo
Products (P) Ltd. (2016) 159 ITD 266 (ITAT Kolkata)]
Keyman insurance policy - Premium paid on Keyman insurance policy is
allowable as deduction
The premium paid for Keyman insurance policy is allowable as deduction. The nature of expenditure is
to be seen at the time it is incurred. Department could not sit on the armchair
of the assessee and decide as to whether it was appropriate on business
expediency for the assessee to incur such an expenditure or not. The argument
of the department that it is a colourable device is rejected by the High Court.
(Related Assessment year 1994-95 to
2000-01)
[CIT v. Escorts Heart
Institute & Research Centre Ltd. (2012) 349 ITR 8 : 249 CTR 141 : 69 DTR
250 (Del), CIT v. Rajan Nanda (2012) 349 ITR 8 : 249 CTR 141 : 69 DTR 250 (Del)
Premium on the keyman insurance policy
of a partner of the firm is wholly and exclusively for the purpose of business
and is allowable as business expenditure.
[CIT v. B. N. Exports (2010) 323
ITR 178 : 231 CTR 227 : 190 Taxman 325 : 37 DTR 381 (Bom)]
CBDT
Clarification on Admissibility of expenditure incurred by a Firm on Keyman
Insurance Policy in the case of a Partner under section 37
The
CBDT has clarified that expenditure incurred by a Firm on Keyman Insurance Policy
in the case of a Partner is admissible under Section 37 of Income Tax Act,
1961, as under:
CBDT
Circular No. 38/2016 dated 22.11.2016 F.No.279/Misc./140/2015-ITJ
Subject: Admissibility of expenditure incurred
by a Firm on Keyman Insurance Policy in the
case of a Partner- Reg.
1.
The issue relating to admissibility of expenditure incurred by a firm on Keyman
Insurance Policy premium in the case of a partner has been a contentious one.
2.
CBDT Circular no. 762/1998 dated 18.02.1998 clarifies that the premium paid on
the Keyman Insurance Policy is allowable as business expenditure. However, in
case of such expenditure incurred on a partner of a firm, the general approach
of the assessing officers was to treat the expenditure as not incurred for the
purpose of business and disallow the same.
3.
High Courts have upheld the admissibility of the expenditure incurred by the
firm in the case of the partners. Taking into account the Explanation to Clause
(10D) of Section 10 of the Income-tax Act, 1961 and the CBDT Circular no. 762
dated 18.02.1998, Courts have held that a Keyman Insurance Policy is not
confined to a policy taken for an employee but also extends to an insurance
policy taken with respect to the life of another person who is connected in any
manner whatsoever with the business of the subscriber (assessee).
4.
The High Court of Punjab and Haryana in the case of M/s. Ramesh Steels, ITA No.
437 of 2015, vide judgement dated 2.2.2016 (NJRS citation 2016 -LL-0505-68),
reiterating the above view held that, “the said policy when obtained to secure
the life of a partner to safeguard the firm against a disruption of the business
is equally for the benefit of the partnership business which may be effected as
a result of premature death of a partner. Thus, the premium on the Keyman
Insurance Policy of partner of the firm is wholly and exclusively for the
purpose of business and is allowable as business expenditure”.
5.
The above view has been accepted by CBDT and the judgment has not been further
contested.
6.
In view of this, it is a settled position that in case of a firm, premium paid
by the firm on the Key-man Insurance Policy of a partner, to safeguard the firm
against a disruption of the business, is an admissible expenditure under
section 37 of the Act.
7.
Accordingly, henceforth, on this settled issue, appeals may not be filed by the
department and those already filed, may be withdrawn/ not pressed upon.
8. The above may be brought to
the notice of all concerned
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