28 November 2007
Query regarding tax payable on insurance policy taken under employer – employee scheme:
As per section 17(2) (v), any life insurance premium paid by employer will be taxed as perquisite in the hands of employee.i.e employer will have to assign the policy to employee on very first day & then only employee can enjoy the rights of the policy & with this benefit employee will have to pay tax on premium paid by employer since it is consider as perquisite.Now , defer assignment is also available to employer i.e employer can assign policy to employee in the future.
A) What will be the legal position if life insurance premium is paid by employer on life policies taken out by employer himself on lives of one or more employee?
Note that employee has not himself made proposal to LIC, it is done by employer himself to protect his business interest and staff welfare measure. Till the date policy is assigned i.e. after 3 to 5 years by employer in favor of employee, all benefit will accrue to employer. In case of death before assignment, maturity proceeds will go to employer.(employer is deferring assignment of policy because if policy is assign & employee leaves the company after assignment than employer is the looser so employer will assign the policy in the future. policy is taken just to motivate employee for not to leave company / retain the employee at least for 5 years & after 5 years policy will be assign to employee. so in case if employee leaves the company before 5 years than employer have the rights to surrender the policy for cash & encash the premium paid.
B) Whether it will be added to salary as perquisite? If yes when? I.e. weather at inception or at the time of assignment.i.e after 5 years.weather employer get tax deduction u/s 37(1) in case of defer assignment?if suppose it is added in salary at the time of assignment than weather all premium paid earlier or surrender value of policy would be taxable?
C) On what value of perquisite, tax is payable i.e. on premium paid earlier or on surrender value? bcoz after 3-5 years when policy is assign to him, cash value of the policy in the hands of employee will be only the surrender value which could be as low as 40 % of premium paid. (Since, in key man policy when it is assign to individual, tax payable by him is on surrender value of policy & not on premium paid – as per circular 762).u/s 17(2)(v),it is mention that premium payable is added in salary as perquisite.
D) Weather any F.B.T is payable by employer on this policy? Bcoz if F.B.T is payable u/s 17(2)(vi) or u/s 115 WB than it should not taxed as perquisite u/s 17(2)(v) & employer will have to pay 20 % on 30 % of premium paid as F.B.T , ideally 7 % only & maturity would be totally tax free .
F.B.T: where the benefit are fully attributable to the employee. It is taxed in the hands of employee but where the benefit are usually enjoyed collectively by the employees & can not be attributable to individual employee, they shall be taxed as F.B.T section 115WB (2) & 115 WC.if premium paid is consider as welfare expenses than it is F.B.T.
can we treat employer /ee insurance policy as group insurance policy whereas in employer/ee case employer will have to take different policies for all different employee & in case of group insurance policy only one policy is issued & group insurance policy is now treated as fringe benefit & f.b.t is payable by employer.
E)does it make any difference on taxation part if employer/ee policy is taken on life of the directors who is also share holder & employer company is closely held co.& he is handling major shares in the company.
please give the detail answer on the above as per income tax point of view , legal point of view & company law point of view.
as you have ask to send querry one by one , but pls note that all question is related to employer employee insurance policy.it is send in a set of 5 querry so that one can answer it keeping in mind the other question also.
if you have any answer to my querry , pls send me.
19 November 2008
Employee should have all rights in the perk provided. Please note the case for your reference:
Employee must have a vested right to perquisites - One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein - CIT v. L.W. Russel [1964] 53 ITR 91 (SC).
What is perk and what is amenity, the right to identify is with CBDT:
Powers entrusted to Board to identify ‘fringe benefit’ or ‘amenity’ - Words ‘fringe benefit’ or ‘amenity’ are well-understood, both in daily and in commercial use and in backdrop of provisions contained in sub-clauses (i) to (v) of section 17(2), power given to Board under sub-clause (vi) to identify ‘fringe benefit’ and ‘amenity’ is not open to challenge on ground that it is unguided, arbitrary and as such suffers from vice of excessive delegation - BHEL Employees’ Association v. Union of India [2003] 128 Taxman 309/261 ITR 15 (Kar.)/Aditya Cement Staff Club v. Union of India [2003] 131 Taxman 609 (Raj.).
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