How employers can help staff save tax beyond 80C
by VIVEK KARWA, CPFA., CFPCM , Financial Chronicle 5/7/2012
Indian tax laws allow an individual to invest up to Rs 1,00,000 in a list of investments that qualify under section 80C and help the taxpayer save taxes of up to 30 per cent if the person is in the highest slab along with the cess. The intent of the law is to force individuals to invest at least for the sake of saving tax, but, the main purpose is to create savings for future needs. India does not have social security schemes, hence, it becomes even more important for every individual to save. We are seeing a gradual shift from guaranteed benefits to a contributory benefits system for many public and private sector employees.
Employees leaving organisations prematurely bring liabilities to the company in form of compensations during accidents/death, and such premature exits from the workplace also causes great amount of financial stress to the employee and his family because income stops abruptly.
Companies invest heavily in training its employees so that they learn the processes quickly and can start yielding returns in a short span of time. The biggest problem today is attrition.
Companies can take some initiatives to create loyal employees in addition to benefits mandated by law like PF or ESI. Since the amounts received by mandated laws are very marginal, companies may look at other options where the employees can protect their families, save higher taxes over and above the section 80C and help the employee save for future needs.
Group insurance: This is the cheapest form of insurance that most companies offer employees to protect families in case of premature death. The premiums can be paid by the company and in some cases, contributions are made by the employees also.
Keyman or key person insurance: A company may sign up for key man insurance on the life of certain employee or employees who may be contributing significantly to the business by virtue of experience, contacts, knowledge or expertise, who might be a loss to the company by quitting. The insurance compensates the company to the extent of cover taken on the employee’s life. Like the group insurance, this policy also is a term cover, and the company can claim the premium paid as an expense in its books.
The key difference between the group insurance and keyman’s insurance is that in the former the employee’s nominee gets the sum assured and in the latter, the company is compensated for the keyperson’s loss.
Employer employee insurance (EEI): This is a unique insurance product through which an employer can give his employee all three benefits – protection, tax savings and savings at the same time and earn an employee’s company loyalty.
There are no specially designed products under this scheme. Regular insurance products, both traditional and Ulips, can be purchased under this scheme.
For EEI, the employer, while signing the contract with the insurer, mentions the number of years the premiums will be paid by the employer on behalf of the employee and the number of years the policy will continue wherein the employee would remain covered.
The premiums paid by the company can be claimed as expense under section 37(1) of the IT Act. No tax is charged in the hands of employee either, if the employee after assignment decides to continue paying premiums, he will enjoy section 80C benefit also. The death claims will be tax free in the hands of the nominee under section 10(10D). If it’s a traditional insurance product, the surrender value (SV) is generally very low. The SV is generally calculated as 30 per cent of all the premiums paid, less the first year premium.
(The writer is a CFPCM. The views expressed are personal, and do not necessarily represent that of the organisation. FPSB India is the sole marks licensing authority for the CFPCM marks in India)
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