A Keyman Insurance Policy is a life insurance policy taken by an organization on the life of its key employee(s). The objective is to safeguard the business against financial losses arising from the untimely demise or incapacity of the key personnel. Under the Income Tax Act, 1961, the taxation of receipts from Keyman Insurance Policies is governed by Section 56(2)(vi), ensuring that such payouts are brought into the tax net.

Understanding Keyman Insurance Policy

A Keyman Insurance Policy is defined under Section 10(10D) as a life insurance policy:

• Where the employer or business entity is the proposer and pays the premiums.
• Taken on the life of an employee or key personnel.
• Intended to indemnify the business for financial losses resulting from the insured’s death or incapacity.

Taxability of Receipts Under Section 56(2)(vi)

1. Scope of Section 56(2)(vi):
   • Any sum received under a Keyman Insurance Policy that does not qualify for exemption under Section 10(10D) is taxable.
   • The receipt is taxed under the head ‘Income from Other Sources.’
2. Nature of Taxability:
   • The entire sum received, including any bonuses, is taxable as income if the policy is classified as a Keyman Insurance Policy.
3. Applicability of Exemptions:
   • If the policy matures and the receipts are not treated as Keyman Insurance Policy proceeds (e.g., transferred to the individual and premiums are subsequently paid by the individual), such sums may qualify for exemption under Section 10(10D).

Tax Rate

The receipts are taxed at the applicable slab rate of the taxpayer, as they are considered part of the gross total income.

Examples of Tax Treatment

1. Receipt by the Employer:
   • A company receives ₹50,00,000 as proceeds from a Keyman Insurance Policy on the death of its CEO. This amount is taxable as ‘Income from Other Sources’ in the hands of the company.
2. Receipt by the Employee:
   • A Keyman Insurance Policy is assigned to the key employee, and the policy matures after the assignment. If the premiums post-assignment are paid by the employee, the maturity proceeds may qualify for exemption under Section 10(10D).

Deductions for Premium Paid

1. By the Employer:
   • The premiums paid by the employer for a Keyman Insurance Policy are treated as a business expense and allowed as a deduction under Section 37(1).
2. By the Employee (Post-Assignment):
   • If the policy is assigned to the employee and the premiums are paid by them thereafter, the deduction is available under Section 80C, subject to applicable limits.

Judicial Precedents

In the case of LIC of India vs. CIT, the court emphasized that proceeds from a Keyman Insurance Policy are taxable under Section 56(2)(vi) unless they qualify for exemption under Section 10(10D).

Conclusion

The tax treatment of Keyman Insurance Policy receipts under Section 56(2)(vi) ensures that such payouts are appropriately taxed unless exemptions apply. Businesses and individuals must understand the nuances of this provision to comply with tax laws and optimize their tax liability. Proper documentation and timely assignments of policies are critical for availing potential exemptions.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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