Keyman Insurance Policy-White Paper

8/12/2019 Keyman Insurance Policy-White Paper

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KEYMAN INSURANCE POLICIES

WHITE PAPER

The Life Insurance Policies which are proposed to be an organization (employer) on life of

some of its key persons will be deemed to be a keyman insurance policies.

Premium paid will be allowed as an expenditure as per ircular of the !oard and also as decided

by !ombay "igh ourt.

The sum recei#ed on such policy (except on the sad e#ent of death of insured person) shall be

taxable as income under the head business or other sources.

$ny sum recei#ed under a keyman policy is considered as business income u%s &' (#i). This may

be in hands of company or keyman. In case of death of insured sum recei#ed by legal heirs ornominee shall be income from other sources if not assessed under the head business or salaries.

"owe#er for allowability of premium as business expenditure there must be clear and

undisputed link between ser#ices of insured person with business of employer.

The amount recei#ed by employer will be taxable as business income.

In case the proposer of insurance policy is not employer but the employee then premium paid by

employer will be peruisite in hands of employee.

*ele#ant pro#isions which may be applicable in case of employer or employee are reproduced

below (this list is not exhausti#e because general pro#isions are not reproduced)+

I,-/0T$1 $T 2342

567 -8 23429

$n $ct to consolidate and amend the law relating to income0tax and super0tax !e it enacted by

Parliament in the Twelfth :ear of the *epublic of India as follows+

"$PT/* I

P*/LII,$*:

;hort title extent and commencement.


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C65(2?A) any sum recei#ed under a life insurance policy including the sum allocated by way of

bonus on such policy other than=

(a) any sum recei#ed under sub0section (7) of section '?AA or sub0section (7) of section

'?AA$> or

(b) any sum recei#ed under a @eyman insurance policy> or

(c) any sum recei#ed under an insurance policy issued on or after the 2st day of $pril &??7

CC5but on or before the 72st day of arch &?2&9 in respect of which the premium payable for

any of the years during the term of the policy exceeds twenty per cent of the actual capital sum

C'5assured> or9+

C35(d) any sum recei#ed under an insurance policy issued on or after the 2st day of $pril &?2&

in respect of which the premium payable for any of the years during the term of the policyexceeds ten per cent of the actual capital sum assured9>

Pro#ided that the pro#isions of '?5sub0clauses (c) and (d)9 )9 shall not apply to any sum recei#ed

on the death of a person+

Pro#ided further that for the purpose of calculating the actual capital sum assured under '25sub0

clause (c)9 effect shall be gi#en to the CD5/xplanation to sub0section (7) of section '? or the

/xplanation to sub0section (&$) of section '' as the case may be9.

'&5/xplanation 2.=8or the purposes of this clause

/xplanation &.=8or the purposes of sub0clause (d) the expression


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&'. The following income shall be chargeable to income0tax under the head


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(7) The pro#isions of sub0section (&) shall apply only to so much of any premium or other

payment made on an 35insurance policy other than a contract for a deferred annuity issued on or

before the 72st day of arch &?2&9 as is not in excess of twenty per cent of the actual capital

sum assured.

/xplanation.=In calculating any such actual capital sum assured no account shall be taken=

(i) of the #alue of any premiums agreed to be returned or

(ii) of any benefit by way of bonus or otherwise o#er and abo#e the sum actually assured which

is to be or may be recei#ed under the policy by any person.

2?5(7$) The pro#isions of sub0section (&) shall apply only to so much of any premium or other

payment made on an insurance policy other than a contract for a deferred annuity issued on or

after the 2st day of $pril &?2& as is not in excess of ten per cent of the actual capital sumassured.

/xplanation.=8or the purposes of this sub0section or

(ii) any benefit by way of bonus or otherwise o#er and abo#e the sum actually assured which is

to be or may be recei#ed under the policy by any person.9

*ebate on life insurance premia contribution to pro#ident fund etc.

''. 25

&?5(&$) The pro#isions of sub0section (&) shall apply only to so much of any premium or other

payment made on an insurance policy other than a contract for a deferred annuity as is not in

excess of twenty per cent of the actual capital sum assured.

/xplanation.=In calculating any such actual capital sum no account shall be taken=

(i) of the #alue of any premiums agreed to be returned or

(ii) of any benefit by way of bonus or otherwise o#er and abo#e the sum actually assured which

is to be or may be recei#ed under the policy by any person.9


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*ele#ant ircular0 extracxt from ircular

8rom &7? IT* 2& (;t.) rele#ant para 26 is at page &?0&2

.!.A.T. irculars

ircular ,o.C4& dated 2'th 8ebruary 233'.

;ubEect + 8inance (,o. &) $ct 2334 F /xplanatory ,otes on pro#isions relating to Airect Taxes.

Taxation of a sum recei#ed under the keyman insurance policy

26.2 $ @eyman Insurance Policy of the Life Insurance orporation of India etc. pro#ides for

an insurance policy taken by a business organization or a professional organization on the life on

an employee in order to protect the business against the financial loss which may occur fromthe employeeGs premature death. The H@eyman is an employee or a director whose ser#ices

are percei#ed to ha#e a significant effect on the profitability of the business. The premium is

paid by the employer.

26.& There were some doubts on the taxability of the income including bonus etc. from such

policy and also regarding the treatment of the premium paid F whether it should be allowed as a

capital expenditure or as a re#enue expenditure. The $ct therefore lays down the tax treatment

of the @eyman Insurance Policy.

26.7 lause (2?A) of section 2? of the Income0tax $ct exempts certain income from tax. The$ct amends clause (2?A) of section 2? to exclude any sum recei#ed under a @eyman Insurance

Policy including the sum allocated by way of bonus on such policy for this purpose.

26.6 The $ct also lays down that the sums recei#ed by the said organization on such policies be

taxed as business profits > the surrender #alue of the policy endorsed in fa#our of the employee

(@eyman) or the sum recei#ed by him at the time of retirement be taken as Hprofits in lieu of

salary for tax purposes> and in case of other persons ha#ing no employer0employee relationship

the surrender #alue of the policy or the sum recei#ed under the policy be taken as income from

other sources and taxed accordingly. The premium paid on the @eyman Insurance Policy is

allowed as business expenditure. taxmanagementindia.com

26.D The amendments take effect from the lst day of -ctober 2334.

5;ection 7 6 ' 2? and &29

8rom the Judgment of !ombay "igh ourt in case of IT #. !. ,. /xports


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&?2? (7) TI 2'4 0 !-!$: "IK" -*T

M @eyman Insurance Policy for section 2?(2?A) is not confined to a policy taken by a

person on life of an employee but also extends to an insurance policy taken with respect to life

of another who is connected in any manner whatsoe#er with business of subscriber

There is no rational basis to confine allowability of expenditure incurred on premium paid

towards a @eyman Insurance policy only to a situation where policy is in respect of life of an

employee

"IK" -*T -8 !-!$:

IT

#.

!. ,. /xports

IT$ ,o. &C26 of &??3

arch 72 &?2?

*/L/N$,T portion with high lights+

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D. The effect of lause 2? A is that a sum recei#ed under a life insurance policy

is not to be included in computing the total income of any person. "owe#er a sum

recei#ed under a @eyman Insurance Policy forms a part of the total income and is liable

to be offered to tax. 8or the purposes of lause 2?A a @eyman Insurance Policy is a

life insurance policy taken by a person on the life of another person who is or was the

employee of the person who subscribes to the policy of insurance or is or was connected

in any manner whatsoe#er with the business of the subscriber to the policy. In other

words a @eyman Insurance Policy for lause 2?A is not confined to a policy taken by a

person on the life of an employee but also extends to an insurance policy taken with

respect to the life of another who is connected in any manner whatsoe#er with the

business of the subscriber.


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4. The entral !oard of Airect Taxes has issued a circular on 2'th 8ebruary 233'

(ircular C4&) which clarifies the scope and purpose of the pro#ision. Paragraph 26.2 of

the circular states thus +

H26.2 $ @eyman Insurance Policy of the Life Insurance orporation of India etc. pro#ides

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 Gs premature death. The H@eyman is an employee or a director

whose ser#ices are percei#ed to ha#e a significant effect on the profitability of the

business. The premium is paid by the employer.

C. The ircular notes that there were certain doubts on the taxability of the income

including bonus recei#ed from such policies and as regards whether the premium paid

should be allowed as capital or as re#enue expenditure. The circular clarifies that the $ct

lays down the tax treatment for a @eyman Insurance Policy. The circular clarifies that

the premium paid on a @eyman Insurance Policy is allowable as business expenditure.

3. The effect of ;ection 2? (2? A) is that monies which are recei#ed under a life

insurance policy are not included in the computation of the total income of a person for

a pre#ious year. "owe#er any sum recei#ed under a @eyman Insurance Policy is to be

reckoned while computing total income. 8or that purpose a @eyman Insurance Policy

means a life insurance policy taken by a person on the life of another person who is or

was in employment as well as on a person on who is or was connected in any mannerwhatsoe#er with the business of the subscriber. The words His or was connected in any

manner whatsoe#er with the business of the subscriber are wider that what would be

subsumed under a contract of employment. The latter part makes it clear that a @eyman

Insurance Policy for the purposes of lause 2? A is not confined to a situation where

there is a contract of employment. lause 2? A relates to the treatment for the purpose

of taxation of moneys recei#ed under an insurance policy. In this appeal the ourt has to

determine the uestion of expenditure incurred towards the payment of insurance premium

on a @eyman Insurance Policy. The circular which has been issued by the entral !oard

of Airect Taxes clarifies the position by stipulating that the premium paid for a @eyman

Insurance Policy is allowable as business expenditure. In the present case on the uestion

whether the premium which was paid by the firm could ha#e been allowed as business

expenditure there is a finding of fact by the Tribunal that the firm had not taken

insurance for the personal benefit of the partner but for the benefit of the firm in order

to protect itself


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against the set back that may be caused on account of the death of a partner. The obEect

and purpose of a @eyman Insurance Policy is to protect the business against a financial

set back which may occur as a result of a premature death to the business or professional

organization. There is no rational basis to confine the allowability of the expenditure

incurred on the premium paid towards such a policy only to a situation where the policy

is in respect of the life of an employee. $ @eyman Insurance Policy is obtained on the

life of a partner to safeguard the firm against a disruption of the business that may

result due to the premature death of a partner. Therefore the expenditure which is laid

out for the payment of premium on such a policy is incurred wholly and exclusi#ely for

the purposes of business.

Araft explanatory letter to the $- or other authorities about claim for keymen insurance policies+

*eg. + @eymen Insurance Policies F about allowability of premium paid by assessee

The policies on life of key men (in our case partners % Airector% executi#es) of the firm% company

) co#er life risk of key men who are associated with the firm % company in its business as main

pillars of business. In case of unfortunate e#ent of death of life of co#ered key man the firm %

company and %or the concerned key man will get insurance money. This will help the firm to face

difficulties which it may otherwise face in case of sudden death of any key man.

"a#ing key menGs policies pro#ide financial stability and key manpower stability. These are #ery

important for long0term stability and good will of business and confidence of customers

suppliers ser#ice pro#iders and employees of the firm% company.

Therefore the premium paid for such policies is in the nature of Qinsurance premiumG incurred

in the normal course of business of the firm% company.

2) The expenses are on account of insurance premium.

&) The premium paid is not a personal expense of the firm % company and it is also not a capital

expenditure F it is recurring expense to get co#er of risks.

7) @eymanGs insurance policies are taken on life of #arious keymen of the firm% company to

reduce risks and financial uncertainties which may caused due to death of key men of the firm%

company. Thus the expenses on this account is wholly and exclusi#ely incurred for the purpose

of business.

6) In ircular ,o.C4& dated 2'th 8ebruary 233' issued by the !AT in para 26.6 it is stated

that H The premium paid on the @eyman Insurance Policy is allowed as business expenditure.


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*ele#ant para 26 of the circular which was issued in relation to key menGs insurance premium0

taxability of insurance money and allowability of premium is attached. This is reported in &7?

IT* 2& (;t.) rele#ant para 26 is at page &?0&2

The abo#e circular is fully applicable in our case and it is also binding. In #iew of the same we

reuest your honor to kindly allow keymens insurance premium.

Be also rely on Eudgment of the !ombay "igh ourt in case of IT #. !. ,. /xports &?2? (7)

TI 2'4 0 !-!$: "IK" -*T a copy of which is also attached.

Be hope the abo#e explanation will be found satisfactory.

Thanks.

@eymens policies are financing and tax deferment tools+

It can be said that keymens insurance policies are suitable tools for deferment of tax liability.

!ecause keymens policies are generally proposed when there is good profit in an organization.

These policies also pro#ide facility to obtain loan against policy based on its surrender #alue.

Therefore in case of need the organization can also take loan and such loan being secured loan

carry lower rate of interest. Thus some financial le#erage can be pro#ided.

In case at some time business has problem there is loss and financial position is tight due to

which it is not possible to pay premium and funds are reuired then the policy can be

surrendered to realize funds. This should be after due consideration of all other options a#ailableand loss on surrender of policy.

,ot to treat as apital /xpenditure or in#estment+

The premium cannot be considered as in#estment or capital expenditure for the purpose of

Income0tax $ct. This is because if the sum paid is considered as a capital expenditure or an

in#estment then the following conseuences will take place.

a) The amounts paid will be disallowed and therefore there will be no sa#ing of tax.

b) The amount recei#ed on the policy including bonus or other profit shall be treated as income

u%s &' although the payments made were not allowed. Therefore this will amount to double

taxation.

Therefore it is clear that the legislature ha#e considered taxability of sums recei#ed as income

and payment will be allowable.


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The purpose of amendment of section &'+

To curb the chances of claim of premium as business expenditure and to claim money recei#ed

on policy as capital receipts #arious amendments were made in the $ct by the 8inance ( ,o.&)

$ct 2334.

The clause (#i) in section &' was inserted by the 8inance (,o.&) $ct 2334 w.e.f. from l.2?.34.

$t the same time section 2C was also amended whereby it was pro#ided in section 2C(7)(ii) that

any sum recei#ed under a keymanGs insurance policy including the sum allocated by way of

bonus on such policy shall be considered as profits in lieu of salary. ;ection 2? (2?A) was also

amended to pro#ide that sum recei#ed under key manGs insurance policy shall not be tax free.

Therefore if any amount under keymanGs policy is recei#ed by the employee then it will be

considered as income of employee under the head income from salaries and if the amount isrecei#ed by the employer or any other person who is not employee then the amount recei#ed by

employer or such other person shall be considered as business income of the employer or such

other person u%s &'. In case the amount is not so considered then the same will be considered as

income under head Qother sourcesG.

$nother way to look at @I

@eymanGs premium as in#estment+

;uppose accounting policy to treat premium paid as in#estment is adopted in that case premiumpaid can be considered as in#estments thereby increasing book profit. ;imilarly income earned

and accumulated on @I can be considered as income and debited to in#estment account. !y

this way financial position of the company shall impro#e as reser#es will be on higher side.

In income tax return the premium can be claimed and money recei#ed can be considered as

income in the year of receipt as per ;. &'.

"owe#er in that case the $ssessing -fficer may draw ad#erse inference in #iew of accounting

policy adopted by the company. $lthough the circular of the !oard is binding on the re#enue

authorities and it being a beneficial circular has to be followed. "owe#er in that case scope of

dispute shall increase.

$nother aspect to be considered is that in case of treating premium as in#estment the book profit

of company will increase therefore there can be higher liability of $T u%s 22DJ!.

BUDGET 2013 AMENDMENT:


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If the p!"#$ "% &t '%%"(&e)* '!! '+,&t% -e#e".e) /$ the e+p!$e- "% t'e) ,&)e- PGBP

%'+e '% /ef-e P-f"t '&) ('"&% f-+ B,%"&e%%4p-fe%%"&

If the p!"#$ "% '%%"(&e)* "t "% t''/!e "& the h'&)% f the e+p!$ee ,&)e- I+e f-+

S'!'-$

If the p!"#$ "% '%%"(&e) '&) the e+p!$ee )"e%* the '+,&t "% -e#e".e) /$ the !e('! he"- f

the e+p!$ee '&) "% t'e) '% I+e f-+ Othe- S,-#e%

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Keyman Insurance Policy-White Paper