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Section 37(1) of the Income Tax Act Employer-Employee Insurance

  • Author :
  • TATA AIG Team
  • Published on :
  • 12/03/2024

Employer-employee insurance, as delineated under Section 37(1) of the Income Tax Act, signifies a pivotal aspect of fiscal legislation impacting corporate welfare initiatives.

This section allows businesses to claim deductions for premiums paid on insurance policies for their employees, emphasising the mutual benefits of financial security and employee well-being.

The essence of Section 37(1) specifically addresses the deductibility of expenses incurred in the course of business operations, including employer-employee insurance premiums, provided they are expended wholly and exclusively for the business.

Understanding the nuances of Section 37 (1) of the Income Tax Act for employer-employee insurance is crucial for entities aiming to optimise their tax obligations while enhancing their workforce's security and morale.

Overview of Employer-Employee Insurance

Employer-employee insurance under Section 37 1 of the Income Tax Act aims to ensure uniform health coverage for all members of an organisation. These plans are vital components of an employee’s cost-to-company (CTC), with the company covering the premiums on the insurance.

  • Employees can access group medical or term insurance benefits without any direct impact on their salaries. The following are the types of insurance plans that are typically included :

  • Group Health Insurance.

  • Group Term Life Insurance.

  • Group Personal Accident Insurance.

Eligibility for Employer-Employee Insurance

Employer-employee insurance in India is accessible to all types of businesses irrespective of their size or legal structure. The eligibility criteria for availing Employer-employee insurance in India are as follows:

  • Sole proprietors, partnership firms, MSMEs as well as both private and public companies, are eligible to avail the Employer-Employee Insurance.

  • For group medical insurance, a minimum of seven employees is required to be covered under the policy.

  • For group life insurance, the minimum number of employees eligible for coverage is ten.

  • Individuals covered under this policy must be of legally employable age, which ranges from 18 to 65 years.

  • NRIs and foreign individuals employed by a company in India are also eligible for enrollment in their insurance plan.

Tax Benefits of Employer-Employee Insurance

Section 37 (1) of the Income Tax Act provides tax exemption for employer-employee insurance for both employee and employer alike. Here are the tax benefits that both enjoy:

Benefits from the Employee's Perspective

Employees stand to gain various benefits depending on the type of insurance coverage, including group term life, personal accident, or group health insurance plans.

Both employees and their families receive coverage at no additional cost.

Although the employer pays the insurance premium, employees are eligible to claim tax exemption under Section 80C of the Income Tax Act.

Maturity proceeds from the insurance policy are entirely tax-exempt under Section 10(10D) of the Income Tax Act.

Family Members receive financial protection in the unfortunate event of the employee’s death.

Benefits from the Employer's Perspective

Although there is a deduction of TDS on insurance premiums paid by the company, the company can still treat the gross amount as business expenses. Under Section 37 (1) of the Income Tax Act, the company can then avail of tax exemptions on these premiums.

These premiums can be declared as business expenses which enhances the financial benefits to the company.

Corporate-sponsored employee insurance schemes have the potential to reduce attrition rates within the organisation.

Conditions for Deductions Under Section 37 (1) of Income Tax Act

Expenditures must not fall under Sections 30 to 36 of the Income Tax Act to qualify for deduction under Section 37 of the Income Tax Act.

Expenditures should not be of a capital nature. Capital expenditures that have been incurred in acquiring, extending, or improving fixed assets are not deductible under Section 37 1 of the Income Tax Act

Deductions are not allowed for expenses of a personal nature that are unrelated to business activities.

Expenditures must have been incurred within the previous financial year to be eligible for deduction.

Expenditures must be made only for the benefit of the business.

Deductions apply to expenses related to the business carried out during the previous financial year.

Expenditures must be incurred after the business has been set up.

Any expenditures incurred for unlawful purposes or prohibited by law are applicable for deductions.

Deductions Allowed Under Section 37 (1) of Income Tax Act

Section 37 (1) of the Income Tax Act provides deductions on quite a few expenditures by the company. Here are some examples:

Expenses to preserve assets or prevent their loss, destruction, or waste for the benefit of the business.

Expenses for litigation aimed at safeguarding or advancing the interest of the business.

Expenses incurred in defending or upholding the ownership of the business assets through litigation.

Legal expenses, whether civil or criminal, that are incurred only for business purposes.

Expenses for legal services related to obtaining loans from financial institutions.

Royalties paid for the use of the company logo

Consultancy fees for software maintenance.

Expenses associated with environmental monitoring and community development.

Legal fees for drafting agreements and various deeds.

Expenses for modifying articles of association to comply with changes in the Company's Act.

Deductions Not Allowed Under Section 37 (1) of the Income Tax Act

There are exceptions to the deductions allowed under Section 37 (1) of the Income Tax Act. Here are some examples:

Expenditure for breaching contractual terms with the State.

Expenditure on penalties and damages resulting from legal violations.

Litigation costs to rectify title defects or establish ownership.

Legal expenditure for share registration.

Fees for increasing authorised capital.

Expenditure on equity and preference share capital.

Expenditure for acquiring goodwill.

Expenditure on acquiring land rights for mineral extraction.

Fees for obtaining mineral exploration licences.

Expenditure for moving a registered office.

Conclusion

Section 37 (1) of the Income Tax Act serves as a vital provision for companies in India. Understanding the details of this section helps businesses optimise their tax liabilities while also complying with tax regulations.

Optimise Tax Saving with Tata AIG Medical Insurance

Comprehensive business insurance goes beyond just protecting assets and optimising tax liabilities. It includes prioritising the well-being of employees.

Providing a reliable health insurance plan from a reputable insurance provider like Tata AIG makes this process seamless. With options like group health insurance, companies can offer a genuine commitment to employee health as well as financial security.

Apart from the obvious financial and health benefits this largely strengthens the overall morale and productivity within the organisation. Tata AIG covers employee health against accidents as well as illnesses and other medical emergencies, promoting a sense of security in the workforce.

Invest in safeguarding employee health today for a strong workforce tomorrow.

FAQS

Does Section 37 (1) of the Income Tax Act include expenses on rent as a deductible?

Yes, since rent payments made by businesses fall under operating expenses, they are included as a deductible.

Does Section 37 (1) of the Income Tax Act include expenses made for employee wages?

Yes, since expenses made for employee wages constitute operating expenses, they are included as a deductible.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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