Keyman Insurance Policy- Tax saving Tool

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When a family’s primary breadwinner passes away, his or her death benefits might assist cover the costs of the household. This is a well-known fact.  However,  The idea that life insurance may perform a similar function in the version of Keyman insurance for businesses is less widely understood. In this article, you will understand the keyman insurance policy and how it is beneficial for the company, and how the company can save taxes through it.

What is a Keyman Insurance Policy?

The Keyman Insurance Policy refers to an insurance policy where the company ensures the life of the company’s keyman such as the CEO or Directors or Important employee.

In the Keyman Insurance Policy, the life of the employee or company’s director is insured by the employer, and the benefits are transferred to the employee in case the claim is made.

When we say “keyman,” we’re talking about an employee who is crucial to the success of the company’s business since they have specific expertise and/or extensive duties.

Keyman Insurance Policy is not a separate insurance plan, but just the use of life insurance for a particular situation.

What is the need of Keyman Insurance Policy?

With keyman insurance, businesses can get back on their feet if one of their most important assets is lost.

Individual skills are becoming increasingly vital to the success of many businesses, and people are becoming a key component in how investors value organizations.

Every organization has at least a few workers that make a substantial contribution to the success and growth of the business.

As a result, It’s a good idea to have life insurance in case the worst happens and they pass away unexpectedly.

Furthermore, the sudden death of a key employee might have a negative impact on the company’s finances.

This is when the Keyman insurance policy comes in handy and becomes a must-have for many organizations.

Keyman Insurance as Tax Saving Investment Tool

tasks_2021_2x Problem of many

Generally, when company owners wish to take funds from the company’s profit either they withdraw in the form of salary or in the form of a dividend.

Salary is taxable in the hand of the director as per the tax slab which goes up to 30% plus cess & surcharge of the amount withdrawn.

On the other hand, when a company declares the dividend to the company’s shareholders, there is double taxation on the dividend income which needs to be paid by both companies as well as shareholders.

In dividend, companies pay dividend distribution tax [DDT] at the rate of 15% plus cess & surcharge and shareholder pay tax @ 10% plus cess on dividend amount above Rs.10 lacs u/s 115BBDA.

tasks_2021_2x Solution

Here, an Endowment cum Insurance policy plays a smart role to save taxes as well as provide tax-free funds in the hand of the company’s owner.

When a company makes payment of the premium amount in Endowment cum Insurance policy, Company shall claim expense u/s 37(1) unlike the limit of Rs.1.50Lac u/s 80C of the Act. Hence, save income tax up to 30% on the amount of investment.

And such investment policy shall give a tax-free return in the range of 7-8% (unlike FD Interest Rate 5-6% which is also taxable)

Further, the maturity of the fund also defers the tax in the hand of the keyman (employee/owner).

tasks_2021_2x Overall Benefit

Overall Benefit of keyman insurance policy

What are the advantages of the Keyman Insurance Policy?

  • In cases where a key employee dies, the firm receives financial compensation to help it deal with the loss.
  • Employers that pay for their employees’ keyman insurance can deduct the premiums as a business cost under Income-tax Act Section 37(1).  Thus, you can save on taxes while Income Tax Return filing if you utilize Keyman Insurance Policy.
  • You don’t need to inform or get approval in advance from the Income Tax Department to claim tax deductions for the payment of Keyman Insurance Policy.
  • The term “keyman” encompasses both a man and a woman.
  • You can have a keyman insurance policy for multiple employees.
  • You can employ keyman insurance to protect the partners if you have Limited Liability Partnership Registration or Partnership Firm Registration.
  • With the help of a keyman insurance policy, a company can easily take steps such as recruiting and training viable replacement employees, managing debt and liquidating the company, or even transferring ownership for a profit.
  • With this strategy, high-paid CEOs may receive a raise in their compensation and save money on taxes at the same time. Additionally, it aids in tax planning for the organization.

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  • Directors can also protect their personal families from the whims of the industry and the different business cycles that a corporation must endure.
  • Keyman insurance is essential, especially for family companies that are heavily dependent on a few people. It ensures that the company can withstand the financial burden of unexpected death and continue to operate. Keyman insurance is an inexpensive and straightforward way to protect your company’s most valuable asset.

Benefits of Filing Income Tax Return on Time

Moreover, If you want any other guidance relating to ITR  Filling, please feel free to talk to our business advisors at 8881-069-069.

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