Business Owner? How 'Keyman Insurance' Saves Tax and Stops Your Company from Bankruptcy
You run a successful Private Limited company or a Partnership firm. You have a brilliant tech co-founder or a sales head who brings in 80% of the revenue.
Ask yourself a brutal question: If that person dies in a car accident tomorrow, will your company survive?
Clients might leave. Banks might recall loans. The company valuation might crash. To prevent this, smart businesses in India buy "Keyman Insurance." Not only does it save the business, but the Income Tax Department also supports it.
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| Business Owner? |
1. What Is Keyman Insurance?
Unlike standard term insurance where the family gets the money, in Keyman Insurance, the structure is specific:
- Proposer (Payer): The Company pays the premium.
- Life Assured: The Key Employee (Director, Partner, or Top Talent).
- Nominee (Beneficiary): The Company receives the death benefit.
The money is used to stabilize the business, pay off company debts, or recruit an expensive replacement during a crisis.
2. The "Tax Saving" Secret (Section 37)
This is why Chartered Accountants (CAs) recommend it. But you must be careful with the type of policy.
Under Section 37(1) of the Income Tax Act, 1961, the premiums paid by the company are treated as a legitimate "Business Expense" only if it is a pure Term Insurance Policy.
The Math:
If your company makes ₹1 Crore profit and pays ₹5 Lakhs in Keyman Term Insurance premiums, your taxable profit drops to ₹95 Lakhs. You effectively save 25% (Corporate Tax) on the premium cost.
3. Who Can Be a "Keyman"?
It doesn't have to be just the CEO. It can be anyone whose loss would cause a significant financial dip.
- Eligible: Directors, Partners, Key Sales Heads, or CTOs with specialized knowledge.
- Not Eligible (Crucial): Sole Proprietors cannot buy Keyman Insurance because the owner and the business are the same legal entity. It is strictly for companies (Pvt Ltd, LLP, Partnership) with an employer-employee relationship.
Note: Insurers strictly check the company's profitability (last 3 years' ITR) to decide the cover amount (usually capped at 10x of the company's average net profit).
4. The Tax Trap on Payout
There is no free lunch. While the premiums are tax-deductible, the claim payout (Death Benefit) received by the company is treated as Business Income and is fully taxable.
However, paying tax on a large influx of cash (e.g., ₹5 Crores) is a "good problem" to have compared to the alternative of the company going bankrupt due to the loss of a founder.
Protect Your Legacy
Your employees are your biggest assets, but they are also your biggest risk.
Don't leave your company's survival to luck. Consult your insurance advisor today to set up a Term-based Keyman policy. It protects your balance sheet and lowers your tax bill—a win-win for any entrepreneur.
Disclaimer: This article is for informational purposes only. Tax laws are subject to change. Please consult a Chartered Accountant (CA) to understand the specific tax implications for your company under the Income Tax Act.
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