We pay the premium on a keyman policy on our director's life. Is it deductible, is the maturity money taxable, and does assigning the policy to him before maturity make it tax free?
The premium is claimed under s.37(1) as expenditure laid out for the purposes of the business, and CBDT Circular No. 762 dated 18 February 1998 states in terms that "The premium paid on the Keyman Insurance Policy is allowed as business expenditure". The maturity or surrender money is outside the s.10(10D) exemption and is charged as business profits under s.28(vi) where the employer gets it, as profits in lieu of salary under s.17(3)(ii) where the employee gets it, and under s.56(2)(iv) read with s.2(24)(xi) where neither applies. Assigning the policy to the keyman during its term no longer converts it into an ordinary policy: the Explanation to s.10(10D) as amended by the Finance Act 2013 includes a policy "assigned to a person, at any time during the term of the policy, with or without any consideration", with effect from assessment year 2014-15.
A keyman insurance policy is a life policy the business takes on the life of someone it cannot afford to lose. The tax consequences are settled by four provisions working together, and the trap is at the assignment end.
Start with the exclusion. Section 10(10D) exempts sums received under a life insurance policy but not one that is a keyman insurance policy. The Explanation defines it. The department's own page for s.10(10D) that I fetched prints the definition in its pre-2013 form - "a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person" - and carries nothing about assignment. That page is a stale snapshot and cannot be relied on to show that the later words are absent. The Explanation as amended, on the professional text I fetched, ends: "and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration."
Those closing words were put in by the Finance Act 2013 to kill a specific structure. The company took the policy, deducted the premium, and then assigned the policy to the keyman himself for its surrender value shortly before maturity. On assignment the policy was said to shed its keyman character, so the maturity proceeds came to the individual as an ordinary life policy and were claimed exempt under s.10(10D), while the company had already had the premium as a deduction. The Board's explanatory notes to the Finance Act 2013, Circular No. 03/2014, record the mischief in terms: "It has been noticed that the policies taken as keyman insurance policy are being assigned to the keyman before its maturity", and "The exemption under section 10(10D) is claimed for policies which were originally keyman insurance policies but during the term these were assigned to some other person." The amendment provides that such a policy "shall continue to be treated as a keyman insurance policy", and it "will take effect from 1st April, 2014 and will, accordingly, apply in relation to assessment year 2014-15 and subsequent assessments years". The route therefore closed prospectively; for assessment years before 2014-15 the older law, and the decisions given under it, still govern.
Once the receipt is outside s.10(10D), three charging heads share it out. Section 28(vi) charges as business income "any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy", with an Explanation that "the expression 'Keyman insurance policy' shall have the meaning assigned to it in clause (10D) of section 10"; that clause was inserted by the Finance (No. 2) Act 1996 with effect from 1 October 1996. Where it is the employee who receives it, s.17(3)(ii) brings it in as profits in lieu of salary - the clause expressly picks up "any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy". Where neither head applies, the residual charge is s.56(2)(iv) read with s.2(24)(xi), and both limbs of it are on the department's own pages. Section 56(2)(iv) charges "income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head 'Profits and gains of business or profession' or under the head 'Salaries'", and s.2(24)(xi) defines the income it points to as "any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy". Those two provisions read together are the whole of the residual charge, and that positive text is the basis for it here. One caution about the source: the departmental renderings of s.56 I fetched stop the enumeration of sub-section (2) at clause (viii), so they plainly predate several later insertions. They confirm that clause (iv) is on the statute book in the words quoted; nothing at all can be inferred from what they do not print.
Circular No. 762 dated 18 February 1998, which explained the 1996 amendments, set the whole scheme out in one place at paragraphs 14.1 to 14.5: "The premium paid on the Keyman Insurance Policy is allowed as business expenditure", the sums received by the organisation are taxed as business profit, a surrender value endorsed over to the employee or a sum received on retirement is taken as profits in lieu of salary, and where there is no employer-employee relationship the surrender value or the sum received is taken as income from other sources.
On the premium, the deduction is claimed under s.37(1) as expenditure laid out wholly and exclusively for the purposes of the business, and Circular 762 is the answer to the usual objection. The department's standard line is that the policy is really a personal investment for the director or partner rather than a business protection, that there is no business necessity for it, and that the benefit accrues to the individual and not the firm. Circular 762 states in terms that the premium is allowed as business expenditure, and a circular of that kind binds the officer even where he disagrees with it. Where the insured is a partner rather than an employee the department has run a separate objection - that a firm has no employer-employee relationship with its partner - and I could not establish from any page I fetched what the Board's position on that is, so nothing is stated here about it.
Nothing in the Explanation confines a keyman policy to a pure term policy. The definition I have quoted asks only that the policy be a life insurance policy taken by a person on the life of another who is or was an employee of, or connected with the business of, the first person. Endowment and unit-linked policies therefore fall inside it on the statutory language, which is the whole reason the assignment structure was worth doing - a pure term policy has no surrender value to assign. Be aware that this has been litigated on the back of IRDA circulars requiring keyman cover to be written as term insurance, and see the gaps line below before relying on any particular decision.
The Income-tax Act 2025. Section 2(49)(p) of that Act includes in the definition of income "any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy", and the Act provides that "'Keyman insurance policy' shall have the meaning assigned to it in Schedule II (Note 1)" - both of those I took from the department's own PDF of the Act as amended by the Finance Act 2026. Schedule II, serial number 2, is the successor to s.10(10D): it exempts a sum received under a life insurance policy including bonus, but not a sum received under a keyman insurance policy, and Note 1 carries the definition forward including the assigned-policy words. Section 26 of the 2025 Act charges "any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy" as business income. I have not printed the clause number inside s.26(2) because the two sources I fetched label it differently, and I did not find the successors to s.17(3)(ii) and s.56(2)(iv).
The assignment structure was widely sold and widely used, and policies written before the Finance Act 2013 are still maturing. Whether a particular receipt is exempt or is fully taxable turns on the assessment year in which the sum is received and on when the assignment was made, so the first thing to establish on the file is the date of assignment, not the date of maturity. On the other side, an employer who has been deducting the premium for years should expect the s.37(1) objection when the payout comes, and should have Circular 762 and the board resolution recording the business purpose ready rather than assembled afterwards.
I paid a foreign firm a lump sum for technical know-how that raised the yield of a product I was already making. The Assessing Officer says section 37(1) is shut because I bought an asset of enduring benefit. Is the payment capital?
Can a pharmaceutical company deduct the cost of gifts given to doctors?
I pay an annual fee to keep competitors out of my area. It recurs every year, so is it revenue expenditure?
My employee embezzled money from the business bank account. Can I write that off for tax?
My liability is certain but I cannot put a final figure on it yet and I will not pay it for years. Can I still deduct the provision?
I paid to have a railway station moved off my own mining lease so I could work the ground under it. Is that capital expenditure?
I bought the assets of my business and left part of the price outstanding on interest. Is that interest deductible as interest on borrowed capital?
I spent money issuing fresh shares to raise my capital, and I used the money as working funds. Can I write that expenditure off as revenue?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.
