Employer employee scheme-1

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EMPLOYER 

EMPLOYEE 

SCHEME 

PRESENTED 

BY 

P.T.PATIL

TIME VALUE FOR MONEY 

Making money is easy. Keeping it is the hard part


Are you Getting 

‘MILLION DOLLER’ Advice ? For your Employee’s Retirement 

Buy your tomorrows today


LEARN HOW TO GROW AND PROTECT YOUR SAVINGS 

GUARENTEED FOR AS LONG AS YOU LIVE 

Before investment you compare rates, benefits, charges and the relative 

financial strength of the insurance company 

Decide retirement age and plan backwards: You will need 60-70% of your 

pre-retirement income to support your current lifestyle after retirement. 

Million Doller Advice 

When it comes to financial 

planning, 

Life Insurance is your Life 

Jacket.

CAN YOU THINK LIKE 

DHOLAKIA? 

THEN 

WE 

HAD BETTER 

OPTION 

IN 

THE 

WORLD 

LIFE IS PRACIOUS 

INSURE 

IT

Are You Looking 

At Saving 

100% Taxes 

Of Your Company &The Directors. 

Here Is The Solution>> 


EMPLOYER-EMPLOYEE SCHEME 

Under the Employer Employee scheme any employer 

can decide to propose for the insurance on the lives of 

the designated Executives OR Employees of the 

company. 

To retain the services of the trained and the experienced 

Executives/Employees with the company whose services 

have major contribution for the growth of the business 

qualitatively and quantitatively as well. 


Say, who makes all the profits around here … 

You or your equipment? 

What really produces the profits for your business … 

The machines or the people? 

3 “S” 

SAFETY 

SECURITY 

STABILITY

‣In the present competitive scenario in trade & industry, 

it has become imperative to retain the services of 

trained and experienced employees 

‣And employer needs to make provision through life 

insurance policy … for the dependants of employee 

OR for his old age OR for him as a welfare measure. 


The employer may hold the policy – to encourage his 

employees to continue service with him. 

‣Your success is dependent on your TEAM 

‣And, your TEAM is your BEST ASSET. 

Secure your best asset - EMPLOYEES 


‣Employer needs to give certain additional benefits to a 

select band of employees as a reward for good services. 

‣It’s always a dilemma for the employer about how 

much to pay, and from where to pay, to the family of 

the employee in case he/she dies during service. We as 

insurance advisors say, 

‘you leave it to LIC to take care of that’LIC’s 

Employer-Employee scheme is THE solution 


An Employer has the insurable interest in the life of 

an employee which is recognised by law under 

insurance act,1938.In view of the above, an employeremployee 

scheme gains importance. 

All plans of insurance is allowed. 

Quantum of insurance depends on individual 

employee’s income. 


WHO CAN TAKE THE POLICY 

sole proprietor and his employees 

A partnership firm and it’s employees 

A body corporate and it’s employees 

Any other legal entity like co*operative body, a trust or a mutual society 

and their employees 

Company and it’s Directors-provided the Directors draws the salary from 

the company 

Following are few more situations where Employer - Employee relation 

can be created- 

Wife can be an employee of the husband or vice versa 

Children could be the employees of father /mother or vice versa 

Sibling also can be the employees of other siblings 

Son –in –Law. Daughter –in-Law, Brother, Sisters, Major and Minor 

Children etc 


EMPLOYER-EMPLOYEE SCHEME 

• In the fast changing business world and present 

competitive scenario in the trade and industry, it has 

become imperative for all the prudent and far sighted 

employers to retain the services of the trained and the 

experienced executives/employees with the company 

whose services have major contribution for the 

growth of the business qualitatively and quantitatively 

as well. 


Generally, group of employees are given the benefits by way 

of statutory schemes like Group Gratuity, Group Term 

Insurance and Group Superannuation Scheme. These 

schemes are specially attractive because the premiums paid 

under the scheme are treated as expenditure at the hands of 

the employer and at the same time, it will not be treated as 

income at the hands of employees. However, for certain 

reasons one of the unique life insurance schemes called 

EMPLOYER-EMPLOYEE is also of a great utility to the 

establishment 


The employer-employee scheme gives boost to the insurable 

interest between employer-employee by providing insurance on 

the lives of Executives/Employees of the company to offer them 

very handsome perks and security. 


WHY THE COMPANY SHOULD GO FOR 

EMPLOYEE/EMPLOYER SCHEME ? 

‣ Where the number of employees are below 10, they are not 

allowed to join Group Insurance. But an enlightened employer may 

like to make provision as a welfare measure through life insurance. 

For the dependants of the employee in case of employee’s early 

and premature demise and old age provision for the employee 

himself. 

‣ An employer may desire to give certain additional benefits to the 

select band of employee, as a reward of good services and who 

could not be otherwise compensated. 


‣An employer may hold the life insurance policy as a sufficient 

inducement or encouragement for the employee to continue with 

him since the employer has to spend considerable amount of money 

and time to train a new employee and moreover upon exit of such 

an existing employee, the employer may lose some of his trade 

secrets. 

‣To certain classes of employees whose gross salary is above the 

permissible limits are not entitled for bonuses can be offered an 

additional benefit through life insurance policy in lieu of bonus. 


‣ Some of the Hi-tech employers keep the employees on purely contract 

basis so that they are not liable to make provision for statutory benefits but 

for certain class of employees only they can be offered attractive benefits in 

the form of insurance through life insurance policies. 

‣ In case of retrenchment or for better prospects, employees may come out of 

the present organization and join new company may lose the statutory 

benefits conferred to him in the earlier organization. However, the benefits 

offered under employer-employee can be continued by individual employee 

on payment of premium in future. 

‣ Employee can choose the Life Insurance benefits as per his needs and if at all 

any restrictions are imposed by the employer. They cannot hold good 

beyond 5 years from date of commencement of policy. 


TAX EFFECTS 

• Premium paid by the employer forms perquisites in the hands of employees 

under Section 17(2)V and will be taxed as per the existing structure. 

• However, as per the amendments effected in the Finance Act 2002, in case of 

employees, the perquisites shall not be taxable, At the same time, premium 

will be entitled for the rebate to the concerned employee under Section 80C 

of I.T. Act, 1961 since the premiums paid by the employer are so treated as 

perks. 

• Besides the risk of the employee is covered, the proceeds on maturity of the 

policy will be tax free in the hands of the employee under Section 10(10)(D) 

of Act, 1961. 


TAX EFFECTS (Contd.) 

• The premium paid by the employer under such a life insurance policy would be treated 

as an expenditure subject to the following: 

• (a) The employee knows that this premium is a perquisite to which he is entitled to; 

• (b) That the tax is deducted at source on the value of this perquisite; 

• © That the value of the perquisite will be the premium paid in each policy; 

• (d) That the value of the perquisite shall be restricted to 20% of the “salary” payable to 

the employee or an amount calculated at the rate of Rs.1000/- for each month or a part 

thereof as provided for under Section 40A(v)(a)(ii). 


SECTION 17(2)(V) READS 

AS UNDER” 

• Perquisite includes:- 

• (v) Any sum payable by the employer, whether directly or through a fund, other than a 

recognized fund or an approved superannuation fund on a deposit-linked insurance fund 

established under Section 3G of the Coal Mines Payment fund and Miscellaneous 

Provision Act, 1948 (46 of 1948), as the case may be, Section 6C of the Employees’ 

Provident Fund as and Miscellaneous Provisions Act 1952 (19 of 1952), to the effect an 

assurance on the life of the assesse or to the effect a contract for an annuity. 


Employer’s point of view:- 

• 1) The schemes which are adopted for the welfare of the 

employees certainly help in better productivity and expansion of 

business which ultimately help to increase the gross profits of the 

firm. An employer has the insurable interest in the life of an 

employee is recognised by law under Insurance Act, 1938. 

• In view of the above, an employer-employee scheme gains 

importance. 


2) The premiums paid by the employer are treated as deductible 

expenses of business or profession under Section 37(1) of I.T. Act, 

1961. 

Section 37(1) is defined as “Any expenditure not being the 

nature of capital expenditure or personal expenses of the assessee 

LAID OUT OR EXTENDED WHOLLY AND EXCLUSIVELY FOR 

THE PURPOSES OF THE BUSINESS OR PROFESSION shall be 

allowed in computing the income chargeable to income tax. This 

is besides other specified expenses u/s 30 to 36 and those u/s 37(1) 


• 3) Since the premium paid by the employer is treated as perks 

under Section 17(2)(V), it is binding on the employer to pass a 

resolution to effect an insurance on the life of employees and 

contents of the resolution are made known to the employees also. 

• 4) The total insurance on the life of an employee or more precisely 

the premium payable under the life insurance policy should be 

reasonable and it would be better if the provisions of the Section 

40(A) 2(a) and 40(A) 2(B) is taken care of. 


5) As far as the implementation of statutory schemes like Gratuity, 

Group Superannuation, employer has to go for long term 

commitments and formation of relevant trust to manage the scheme to 

take the tax benefits under the same section. 

But if he adopts employer-employee scheme he can use his own 

discretion as far as the provisions to be made under the scheme. In 

other words, he can always decide the duration of payments and 

thereafter the employee can continue his policy for his own benefits. 

Besides, employer need not have to form the trust or approval from IT 

authorities. 


PROCEDURES TO BE FOLLOWED TO ADOPT THE SCHEME 

• 1) Obtain approval from the Board or the sources authorized to act for and on behalf 

of the firm (Board resolution is to be passed). 

• 2) Arrange power of attorney in favor of persons to execute the scheme. 

• 3) Put up the proposal to LIC of India to effect the coverage and for the issuance of 

policies as per the Plan & Term selected. The proposals will be treated as individual 

proposals received from the employees concerned irrespective of whether the proponent 

is any employer or an employee. Requirements of medical examination etc., shall be 

decided on that basis. The maximum sum assured shall be determined in terms of the 

rules relating to financial underwriting for individual assurances taking into account the 

existing life insurance in force on the life of the employee. 


4) If the employee is the proponent, the policy shall be assigned to the life assured at 

the earliest but under no circumstances later than 5 yrs depending on the terms of 

agreement between the employer and the employee. Separate letter from the 

employer stating the object of insurance, the restrictions he desires to be considered 

in respect of surrender, loan, etc., and that he would assign the policy to the life 

assured at a pre-decided stage, should be obtained stating clearly that this letter of 

the employer will form a part of the proposal. It is not necessary that all the 

insurable employees of the employer be covered under this scheme. 

5) Ensure payment of premium on time. 

6) Proposal Form No.340 has to be used for the purpose. The proposal should be 

signed by a person authorized by a resolution of the firm. 


PROCEDURES TO BE FOLLOWED… 

• 7) In some instance employer may like to finance loan towards payment of 

premium to the employee. Form No.300 can be used to assign the policy as a 

collateral security. 

• 8) i) Copy of the resolution annexed (Annexure “X”). 

• ii) Letter addressed to the employees mentioning the decision to insure his life. 

• iii) Copies of the IT returns of the company to check the profit position. 

• iv) Employee’s previous insurance is to be taken into account and, if required, 

individual ITR’s to be called for. 

• v) Details regarding total employees working in the company, their cadres and 

salaries drawn by them. 


DRAFT FOR BOARD RESOLUTION 

FOR EMPLOYER-EMPLOYEE SCHEME 

Copy of the Resolution passed in the meeting of the Board of 

Directors of …………………………held on …………………… 

Resolved that the Company 

do take Employer-Employee insurance cover in the year 

…………………………….. in respect of the following employees 

of this Company i.e 

1. 

2. 

(cont…), 


The policies shall be taken from Life Insurance Corporation of India. 

The premiums which will be paid by the Company to make the 

provision for life insurance coverage and retirement benefits. 

Further resolved that Sri……………………………of the Company 

is authorised to negotiate the terms and conditions with LIC of India 

in this behalf and sign all the papers and documents required by LIC 

in this behalf. 

CERTIFIED TRUE COPY 

FOR ……………………………………………. 

SIGNATURE………………………………….. 

DESIGNATION ………………………………. 

SEAL OF THE COMPANY 


EMPLOYER – EMPLOYEE SCHEME QUESTIONNAIRE 

• 1. Name of the Employer 

• 2. What is the object of the insurance contract 

• 3. How many employees are working in your unit 

• 4. a) Name of the employee being covered 

b) His designation/occupation 

c) Nature of duties assigned 

d) His annual income 

(cont..), 


• 5. Who will be person authorized by the employer to sign the proposal on 

behalf of the employer. 

• 6. Do you wish to impose any restriction/ conditions in respect of surrender, 

loans etc. by the employee after you assign the policy in favor of the 

employee. 

• 7. Are you agreeable to abide by the conditions of acceptance which shall rest 

solely with the LIC of India. 

I agree that I will assign the policy in favor of the above employee and the 

declarations made by me will form a part of the insurance contract being 

entered into in respect of the employee of mine. 

• Place: 

• Date: 

Signature and seal of the employer/ 

Authorized representative with designation 


CENTRAL OFFICE CIRCULAR 

• Dept: Underwriting & Reinsurance 

• Vide circular reference Actl,/2062/4 dated 11 th March 2006, it was clarified that 

as regards insurance under Employer-Employee Scheme the types of plans 

offered could be other than term insurance also. 

• It is now further clarified that while allowing insurance under employeremployee 

scheme it should be ensured that the employee should not have 

beneficial ownership in the employer company in excess of 51%. For 

ascertaining the limit of 71% shareholding or ownership held by concerned 

employee, his/her spouse, children, sons-in-law, daughters-in-law, parents, 

brother or sisters should be aggregated together. 


•TAX IMPACT..... 

THERE ARE TWO PARTIES INVOLVED IN THE TRANSACTION 

ONE IS EMPLOYEE ANOTHER IS EMPLOYER 

EXAMPLE 

PREM AMT IS RS. 1,00,00,000 

EMPLOYER 

EMPLOYEE 

(-) 1,00,00,000 AS BUSINESS (+) 1,00,00,000 AS PERQS 

EXPENSES U/S 37(1) U/S 17 (2) I.TAX @ 30% 

• 

EMPLOYER CAN PAY I.TAX ON BEHALF OF THE EMPLOYEE 

U/S 192 (1A) ON PERQS. U/S 17 (2)HENCE THE TAX LIABILITY SHIFTED 

TO EMPLOYER 

(-)30,00,000 -------------------- RS. 30,OO,OOO 

NOW TAX ON TAX ALSO WILL BE PAYABLE BY EMPLOYER 9,00,OOO 

AND THIS AMT CAN NOT BE CLAIMED U/S 37(1) 


BUT WHY SHOULD EMPLOYER DO IT? 

EXAMPLE: 

IF WE DON’T TAKE THE POLICY UNDER THE SCEME PROFIT OF THE 

COMPANY WOULD HAVE INCREASED BY RS. 1,30,00,000 

I. TAX WOULD HAVE BEEN RS. 39,00,000 

NET PROFIT WOULD HAVE BEEN INCRESED BY RS. 91,00,000 

• AND IF THE COMPANY DECLARES THIS AMT AS DIVIDEND AGAIN 

DIVIDEND DISTRIBTION TAX @16.6% RS.15,10,600 

• TOTAL TAX LIABILITY OF CO. WILL BE (3900000+1510600)= 5410600 

WHILE WE HAVE PAID ONLY 900000 

NET SAVING IS>Rs.45,10,600/- 


Tax Opinion 

Under this scheme, the employee is the life assured as well as the policy 

holder. The employer agrees to pay the premium on behalf of the 

employee under following circumstances as a reward tool. 

The policy will be assigned to the employer during the conversion of the 

policy. 

The policy will be re-assigned back to the employee only after a specified 

period agreed by a board resolution passed by the company. 


Tax Opinion 

If the employee quits the job within the specified period the employer can 

either surrender the policy for its surrender value to the insurance company 

or absolutely assign the policy to the employee as a part of the terminal 

benefit. 

However if the employee dies during the specified period than 

the benefits of the policy are passed to the nominees of the 



Tax Opinion 

No withdrawal will be allowed to be made by the employer. 

The policy document once issued will be endorsed with a special 

endorsement and dispatched to the employer. 

Life Insurance co has requested us to provide tax advice on its specific 

queries relating to the above mentioned long term rewards programs. 


Tax Opinion 

Tax Implications in the hands of Employer: 

2. Can the company claim business expense under Sec 37(1) when it pays for the 

premiums ? 

Our comments 

It would be possible for the employer to claim deduction u/s 37(1) of the Act. on 

the basis that the expenditure is incurred wholly and exclusively for the purpose 

of business and the employer has no control over the monies paid as a premium. 


Tax Opinion 

2.1.2 Will there be any taxable amount attached when the policy is 

assigned to the company during conversion ? 

Our Comments : 

The first premium is paid by the employer on condition that the policy will be 

assigned to the company during conversion. Hence, at no point of time does the 

employee have right on policy or enjoy the benefit of the policy. 

Based on this, it can be argued that no amount should be subject to tax in the hands 

of the employer when the policy is assigned to the employer during conversion. 


Tax Opinion 

Tax Implications in the hands of Employees : 

Our Comments :2.2.1 When the company is paying the premium on behalf of 

employee will it be treated as perquisite in hands of employee 

Pre-conversion : the first premium would be paid by the employer on behalf of the 

employee. However, the precondition to this payment is that the employee would 

assign the policy. Thus it can be argued that no benefit accrues to the employee as 

the beneficiary of the policy is the employer himself and hence no amount is 

subject to tax as perquisite. 


Tax Opinion 

Lock-in Period : The premium paid would not be taxable as 

perquisite as the employee does not enjoy any benefit till the 

reassignment of the policy in his name. 

Post-Reassignment : The premium paid by the employer would 

be treated as perquisite in the hands of the employee. 


Tax Opinion 

Assignment value : 

The Act or the Income-Tax Rules, 1962 (the Rules) do not specifically 

provide the value at which the perquisite in the nature of assigned policy would 

be subject to tax in the hands of the policy. However, it is pertinent to note 

that Central Board of Direct Taxes 

(CBDT) has vide circular no. 762 dated February 18, 1998clarified that the 

surrender value of the policy, endorsed in favor of the employee would be 

taxable in the hands of the employee as profit in lieu of salary. 

Based on the aforesaid circular, a possible argument could be that when such 

policy is assigned after the payment of few premiums by the employer, the 

surrender value of the policy on the date of assignment would be taxable in the 

hands of the employee. 


Tax Opinion 

Given this, while the Act as well as the Rules are silent on the issue of valuation in 

such cases, analogy can be drawn from the valuation norms for other items of 

perquisites. For most of the other items / perquisite, the Rules provide that the 

expenditure incurred by the employer would be subject to tax as perquisite. 

Accordingly, this may be applied to for assignment of policy as well. Further, the 

Rules specifically provides that in case of transfer of movable assets, the value of 

perquisite would be the cost of incurred by the employer on such asset as 

reduced by depreciation. It can be argued that a policy is a movable asset. 

Based on the above, it can be argued that the value of perquisite for an assigned 

policy would be the cost incurred (premiums paid) by the employer. 


Tax Opinion 

2.2.4 if the value of such policy is taxable as perquisite then the taxation is based on 

which value of the policy (premiums paid or fund value)? 

Our Comments : 

The employee shall be eligible for tax exemption u/s 10(10D) of the Act subject to 

fulfillment of the condition summarized in Annexure A. For Taxation on 

assignment, please refer to answer in para 2.2.1 above. 

2.2.5. What will be the tax treatment of the proceeds of the policy in following 

circumstances : 

a) Death of the employee during the specified period. 

b) Death of the employee after the specified period. 

c) Maturity, withdrawals or surrender done by the employee after the specified 

period. 


Tax Opinion 

Our Comments to all three questions: 

The exemption u/s 10(10D) would be available subject to fulfillment of 

conditions summarized in Annexure A. 


Tax Opinion 

Annexure A 

Exemption under section 10(10D) of the Act would be available subject to the 

satisfaction the following : 

1. Such sum is not received by Assesse in respect of maintenance including medical 

treatment of a Dependant who is a person with disability (as prescribed for deduction 

under section 80DD of the Act) 

2. Such sum is not received under the keyman insurance policy. 

3. The policy premium payable for any of the years during the term of the policy 

does not exceed ten percent of the actual capital sum assured (This condition would 

not apply in case the sum is received on death) 


Tax Opinion 

Annexure B 

CIT vs. L.W. Russel (S3ITR91 (SC) 

In this case certain contribution was paid by the employer society towards the 

premium payable by the respondent-employee to a superannuation fund set up by 

the society. From that fund, certain payments were to be made to the employees 

upon their reaching the age of superannuation. It was sought to be added in the 

taxable income of the employee in the concerned assessment year as contribution 

towards perquisite under s.7(1) Explain.1 sub-cl.(v) of the 


Tax Opinion 

IT Act, 1922. The apex Court held that to be a perquisite, it implies that an 

immediate right is conferred on the employee in respect of those benefits. It cannot 

apply to contingent payments to which the employee has no right till the 

contingency occurs. It was only contingent interest depending upon the reaching 

the age of superannuation. Hence, it was not a perquisite allowed to the 


Commissioner of Income -Tax, delhi vs Lala Shri Dhari (ITR 

192) (Del HC) 

Commissioner of Income-Tax, Delhi Vs. Vinay Bharat Ram 

(129 ITR 128) (Del HC) 


Tax Opinion 

In both the cases the question was raised as to the premium paid by the 

employer towards policy of personal accident insurance of the employee. It was 

held that neither clause (iii) nor (iv) of Explanation 1 to s. 7(1) for the 1922 Act. 

Would be applicable to the amount of premium paid by employer. The 

premium could not be assessed in the hands of the employee as perquisite. 


Tax Opinion 

Commissioner of Income Tax vs J.N.Vas.(240 ITR 101) (Bom HC) Employer paid a 

sum for the purchase of single premium annuity policy on the life of the employee 

cannot be regarded as perquisite within the meaning of section 17(2) of the 

income-tax Act 1961, and consequently cannot be included in the assessee's 

income under the head Salaries. 

The amount of premium paid towards single premium insurance policy did not 

vest in the assesses. At best he had a contingent right therein. 

Commissioner of Income Tax, Karnataka, Banglore. Vs Amco Batteries Limited 

(150 ITR 48) (Kar HC) 



Development of Insurance Professionals’Skills, Habits & Attitude 

Disclaimer: 

The views mentioned above are of the author only. Data and 

charts, if used, in the article have been sourced from available 

information and has not been authenticated by any statutory 

authority. The authors do not claim it to be accurate nor accept 

any responsibility for the same


You can also find this presentation available on our 

http:www.dishaadvisors.com 

FOR DETAILS CONTACT:- 

SRI. P.T.PATIL 

RETD.DEVELOPMENT OFFICER 

LIC OF INDIA,HUBLI 

KARNATAKA STATE 

MOBILE - 09448133179 OR 0836-2333179 

E- mail-patil179@yahoo.co.in

Employer employee scheme-1

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