Taxability of Insurance Taken by Employer for Employees
Introduction
Insurance policies taken out by employers for their employees may be taxable as perquisites. Tax treatment depends on the type of policy, its beneficiary, and the circumstances of payout.
Key Types and Tax Implications
- Keyman Insurance Policy
- A life insurance policy taken out by the employer on the life of key employees.
| Scenario | Employer’s Tax Implication | Employee’s Tax Implication |
| Premium Payment | Deductible as a business expense. | Not taxable as perquisite. |
| Maturity Payout to Employer | Taxable as business income. | N/A |
| Maturity Payout to Employee | N/A | Taxable under “Profit in lieu of Salary.” |
| Payout to Legal Heirs (Death) | Deduction allowed to employer; not taxable for heirs. | N/A |
Note: If, on the occasion of the death of the employee, the employer chooses to pay the maturity amount to the widow/legal heir of the deceased employee, the employer gets the deduction of the premium as a business expense, while the maturity amount is not taxable in the hands of the family member. [Circular No. 573, dated 21-08-1990]
- Employer-Employee Insurance Policy
- Benefits are paid to the employee, typically tax-free under Section 10(10D).
| Scenario | Employer’s Tax Implication | Employee’s Tax Implication |
| Premium Payment | Not deductible as business expense. | Taxable as a perquisite. |
| Maturity Payout | N/A | Exempt under Section 10(10D). |
- Exempt Insurance Policies
Certain employer-paid policies are not taxable in employees’ hands, including:- Recognized Provident Fund.
- Approved Superannuation Fund.
- Group Insurance Scheme.
- Employees’ State Insurance Scheme.
- Fidelity Guarantee Scheme.
- Deposit Linked Insurance Fund established under Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948.
- Deposit Linked Insurance Fund established under Section 6C of Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.