EMPLOYER - EMPLOYEE
SCHEME
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 ?
Ø 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.
Ø 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.
Ø 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.
Ø 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.
Ø 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.
Ø In
case of retrenchment or for better prospects, employees may come out of the
present organisation and join new company may lose the statutory benefits
conferred to him in the earlier organisation.
However, the benefits offered under employer-employee can be continued
by individual employee on payment of premium in future.
Ø 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,
whose net taxable monetary salary (after allowing standard deduction but
excluding the value of the perquisite) does not exceed Rs.1,00,000/-. At the same time, premium will be entitled
for the rebate to the concerned employee under Section 88 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 recognised 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
assessee or to the effect a contract for an annuity.
Employer’s point of view:-
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.