Keyman insurance policy is an insurance policy where the employer ensures the life of its key person who plays a major role in the business of the company. There can be losses due to death or injury to the key person and the purpose of taking this kind of policy is to ensure the losses that may arise due to such death, sickness or injury to the key man.
Keyman insurance policy can be taken by a principal for its agent who plays a key role in its business or by a contractor in the name of key contractee.
Who can be a key person to the company
- Sales Person
- Project Managers
- Specific professionals having specific key skills related to that business or profession
The employer, contractor or principal can claim insurance premium paid on keyman insurance policy as business expenditure if they can prove that such policy has been taken to ensure future losses that may be incurred by the company and the policy has been taken in the interest of business.
Tax Liability at the time of Maturity
Tax liability at the time of maturity of keyman insurance policy depends on the person in whose hands it’s matured. If such policy matured in the hands of employer, principal or contractor then the amount received will be taxable in their hands under section 28 of IT act (i.e. under the head profits and gains from business or profession).
If keyman insurance policy has matured in the hands of employee then the entire amount will be treated as salary income and tax calculation will be done according to section 17 (3) of IT act, 1961.
If proceeds from such keyman insurance policy has been received in any other persons hand then the entire amount will be taxable in the hands of that person under section 56 of IT act (i.e. under the head income from other sources).