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.
It is well settled by many case laws that Personal accident insurance premium paid by employer is not a perquisite if a)the policy is taken out by employer & not by employee on his own voluntarily b)the benefits will accrue to employee in future i.e. contingent.[CIT V Lala Shri Dhar (1972)84 ITR 192,Delhi & P.Newcome v CIIn CIT v Lala Shri Dhar (1972)84 ITR 192(Delhi)though it pertains to per. accident insurance but principal settled is that (i)when employer himself takes out the policy on his own initiative to protect the interest of employees(i.e. proposal forms etc are signed by employer) and (ii) when no immediate benefit accrues to employees and the benefit is contingent on fulfilling of certain conditions and (iii) the employee had not voluntarily taken out the policy and employee was not obliged to pay premium if employer had stopped paying it. The above grounds also holds true in case of life insurance premium paid by employer.
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.
C) What will happen if life policy is assigned to employee after 3 to 5 yrs to employee? I.e defer assignment. In that case, say after 3 to 5 year what would be the tax liability on employee? Since today he is not enjoying any rights of policy & if any claim arise (death claim or maturity claim) before assignment, than it will go to employer.(employer intention is just to motivate employee & not to earn money by getting death claim or maturity claim).
In that case weather employee will have to pay tax in the future i.e. only at the time of policy is assign to him? if in the future policy is not assigned to him & employer surrender the policy for cash, than employee will be the looser , so ideally tax on perquisite should be payable in future only when policy is assign to him.
( for e.g. In the first year, policy is taken by employer but will assign the policy in future , & tax on perquisite is payable in current year , in that case if employee leaves the organization & employer doesn’t assign the policy to him bcoz person is leaving ,employee will be the looser)
D) 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)
E) 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 6 % 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.
More or less related Case laws :
S.V of insurance policy given by management to medical staff in recognition of service is taken as perq.TEMPERLY v SMITH (1956)3 AER92 (page 128 Para 49.16©
Perquisite definition (page 141 Para 51)
- Benefit man by going into his pocket i.e. personal benefit
- Provided by employer in current year DAVID MITCHELL v CIT(1956) 30 ITR 701(C01)
- Enforceable rights: only taxable if it has legal origin & their should be a vested right on a part of the employee. if not than not a perq.CIT v L.W.RUSSEL (1964)53ITR91(sc)
- Personal accident policy is not taxable CIT v LALA SHRIDHAR (1972)84ITR192(
- Pensionary deferred annuity benefit , perq only when vested interest accrued to employee & not on payment basis.CIT v L.W.RUSSEL (1964)53ITR 91 (sc)
- Allow during employment & Directly dependent on services
- Resulting personal advantage. as an unauthorized advantage taken by an employee without employers authority is not amount to perq.CIT v C.KULANDEVILU KONAS (1975)100 ITR 629(mad),NARAYAN NAIR(1989) 180 ITR 303(ker)
- Perquisite includes such benefit which company has agree to provide & the concern person can claim as a matter of rights.A mere advantage without authority or knowledge of the company is not included .CIT v A.R ADAIKAPPA CHETIAR (1973) 91 ITR 90 (MAD)
Valuation of perq: (page 147 Para 52)
- On the basis of their value to the employee & not on the basis of cost to employer. WILKINSON v ROGER SON (1963)49 ITR 395(CA).value is taxed only if it is provided by employer. if not than not taxable even though contract of service provide for perq.(
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Rupesh shah
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