a) Whether the assignee is liable to pay tax on surrender value of Keyman Insurance Policy at the time of assignment or not ?

If answer is affirmative then what is the TDS liability on the Company ?

b) Whether assignee is liable to pay tax on maturity proceeds of Keyman Insurance Policy or not ?

Issue No. 1

Whether the assignee is liable to pay tax on surrender value of Keyman Insurance Policy at the time of assignment or not ? If answer is affirmative then what is the TDS liability on the Company?

Point of View

In respect of the query whether the assignee is liable to pay tax on surrender value of Keyman Insurance Policy at the time of assignment, the Central  Board of Direct Taxation (Herein after called CBDT/Board) has clarified vide its Circular No. 762 dated 18.02.1998 that surrender value of the policy endorsed in favour of the employee to be taken as profit in lieu of salary. In this respect the extract of Circular No. 762 dated 18/02/1998 is reproduced as under:-

“14.4 The Act also lays down that the sums received by the said organisation on such policies, be taxed as business profit; the surrender value of the policy, endorsed in favour of the employee (keyman), or the sum received by him at the time of retirement be taken as “profits in lieu of salary” for tax purposes; and in case of other persons having no employer-employee relationship, the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed according­ly. The premium paid on the Keyman Insurance Policy is allowed as business expenditure.”

Keyman Insurance Policy

On perusal of the Board Circular stated above the surrender value of policy endorsed in favour of employee is to be taken as “profits in lieu of salary” for tax purposes. A profit in lieu of salary is taxable in the hand of employee as provisions of section 17(3)(ii) of Income Tax Act, 1961. In this respect the extract of provisions of section 17(3)(ii) of Act is reproduced hereunder:-

“Section 17(3)(ii): any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

Explanation.—For the purposes of this sub-clause, the expression “Keyman insurance policy” shall have the meaning assigned to it in clause (10D) of section 10

In view of provisions of section 17(3)(ii) of Act and Board Circular No. 762 dated 18.02.1998, the employee (Keyman) is liable to pay tax on surrender value of keyman insurance policy.

As far as TDS liability on the part of company is concerned, in view of provisions of section 17(3)(ii), the company is liable to deduct TDS on surrender value of keyman insurance policy u/s 192 of Income Tax Act, 1961. In this respect we may refer extract of relevant para of Circular No. 4/2020 date 16.01.2020 as under:-

5.2 DEFINITION OF “SALARY”, “PERQUISITE” AND “PROFIT IN LIEU OF SALARY” (SECTION 17): 

5.2.1 “Salary” includes:- i. wages, fees, commissions, perquisites, profits in lieu of, or, in addition to salary, advance of salary, annuity or pension, gratuity, payments in respect of encashment of leave etc.

In this respect we may also refer section 192 of Act, extract of relevant para of section 192 is reproduced hereunder:-

“Section 192. (1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.” 

In view of above TDS will be deducted on profit in lieu of salary  u/s 192 of Income Tax Act, 1961.

Issue No. 2

Whether assignee is liable to pay tax on maturity proceeds of Keyman Insurance Policy or not?

Point of view

In respect of the query “whether assignee is liable to pay tax on maturity proceeds of Keyman Insurance Policy”, in this respect we refer provisions of section 10(10D) of Income Tax Act, 1961. The extract of relevant para of section 10(10D) of Income Tax Act, 1961 which illustrates the income exempt from tax is reproduced as under:-

(10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—

(a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; or

(b) any sum received under a Keyman insurance policy; or

(c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or

(d) any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:

Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person:

Provided further that for the purpose of calculating the actual capital sum assured under sub-clause (c), effect shall be given to the Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be :”

As per the provisions of section 10(10D) of Income Tax Act, 1961 the sum received under keyman insurance policy is not exempt in the hands of employees. So far as taxability on maturity of assigned Keyman Insurance Policy in favour of assignee, the Hon’ble Delhi High Court in case of CIT vs Rajan Nanda ITA No. 400/2008 dt 16.12.2011 held that once the employer assigns the “Keyman Policy” in favour of the employee, the character of the policy changes from it being a “Keyman Policy” to an “ordinary policy”. This is relevant for employees who can then claim exemption under section 10(10D) of the Act on maturity value of such policy assigned in their favour.

Pursuant to the ruling of Hon’ble Delhi High Court in case of Ranjan Nanda (Supra), the Parliament has amended the  provisions of section 10(10D) of Income Tax Act, 1961 and inserted Explanation 1 in Finance Act, 1961 which is effective from 01.04.2013. The extract of Explanation 1 of Section 10(10D) is reproduced hereunder:-

“Explanation 1.—For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration;” 

In view of amended provisions of section 10(10D) the character of “Keyman Insurance Policy” will not get changed after assigning the policy in favour of Keyman (Employee). Therefore the sum received by assignee on maturity of Keyman Insurance Policy is taxable under the provisions of Income Tax Act, 1961 in view of Circular No. 762 dated 18.02.1998.

As regards “what amount is taxable” in the hand of keyman on maturity of Keyman Insurance Policy after assignment of the policy, there is  no clarity in the Income Tax Act, 1961. In this respect we may refer to provisions of section 49(4) and 49(2AB) of Income Tax Act, 1961 for getting clarity in terms of cost of acquisition of Keyman Insurance Policy. In this respect the extract of provisions of section 49(4) and section 49(2AB) of the Act is reproduced hereunder:-

Section 49(4): Where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under clause (vii) or clause (via) or clause x of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purpose of the said clause (vii) or clause (via) or clause (x).

 Section 49(2AB):- Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account while computing the value of fringe benefits under clause (ba) of sub-section (1) of section 115WC.

On perusal of provisions of section 49(4) of Income Tax Act, 1961 it will be clear that tax paid by the assessee under clause (vii) or clause (via) or clause (x) of section 56(2) shall be deemed as cost of acquisition u/s 49(4) of the Act for the purpose of Capital Gain. This is to avoid double taxation.

Similarly, when the assessee has paid the tax on specified security or sweat equity shares u/s 115WC (1)(ba) of Act then the amount of value of such shares shall be deemed to be cost of acquisition for the purpose of Capital Gain. This is also for the reason to avoid the double taxation.

In the absence of any clarity for “what amount is taxable” in the hand of keyman on maturity of Keyman Insurance Policy after assignment of policy, to avoid double taxation, in pursuant of provisions of section 49(4) and 49(2AB) of Act, in my opinion the amount taxable shall be the sum received on maturity of Keyman Policy as reduced by the surrender value of Keyman Insurance Policy by the Keyman at the time of assignment of policy on which the assessee has already paid tax.

(Author can be contacted at vikaskalmegha@gmail.com)

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