Tax Treatment of Insurance Policy Premium

Insurance premiums are tax deductible if they are expenses incurred wholly and exclusively in the production of income.

Deductibility of Insurance Premiums for Employers

For an expense to be deductible, it must be revenue in nature. Generally, this means that the expense must have been wholly and exclusively incurred in the production of income and not be capital in nature.

Below are examples of insurance premiums that are deductible:

  • Group term life insurance where employees are the intended beneficiaries, either because the employees are the named beneficiaries or there is a contractual obligation for the employer to pass the payout to the employees or their next-of-kin. This is generally regarded as staff cost.
  • Keyman insurance to cover loss of profit due to the demise or incapacity of a keyman of the business. For more details, see e-Tax Guide on " Deductibility of "Keyman" Insurance Premiums ".
  • Insurance for work injury compensation; expenditure is incurred for the purpose of insuring against statutory liability under the Work Injury Compensation Act as an employer.

An example of insurance premiums that are non-deductible is those relating to group term life insurance where the employer is the beneficiary and there is no contractual obligation for the employer to pass the payout to the employees' next-of-kin. Such expenses are incurred to acquire a capital asset and are not tax deductible.

Taxation of Insurance Premiums for Employees

Where employees are the beneficiaries of an insurance policy taken out by the employer, the insurance protection is a benefit-in-kind derived from employment and taxable under Section 10(1)(b) of the Income Tax Act except for:

  1. Group medical insurance which is provided in lieu of medical cost that would have been reimbursed by employers and the benefit is available to all staff. This is available as an administrative concession granted effective YA 2008;
  2. Group insurance (excluding group medical insurance) where employer has elected not to claim the tax deduction on the insurance premiums so that the premiums will not be taxed in the hands of the employees. This is available as an administrative concession granted effective YA 2013.

Conditions for YA 2013 administrative concession

No upfront approval for this administrative concession is required. Once the company avails itself of the administrative concession, it should apply the treatment consistently for all employees covered by the group insurance policy.

This means that the company cannot choose to report the staff benefit on the share of premiums paid for only some employees covered by the group insurance policy, and claim a partial deduction of premiums paid in its income tax filing.

Investment Holding and Service Companies availing themselves of the YA 2013 administrative concession

The administrative concession does not apply to investment holding companies and service companies that elect for the "cost plus mark-up" basis of tax assessment.

These companies should continue to report the share of insurance premiums paid for the respective employees in their Forms IR8A, if these companies are under contractual obligation to disburse the insurance payout to the employees in the event of a claim.

 

Implication for Employer

Implication for Employee

Revenue

Revenue receipts are taxable; insurance payout is on revenue account if insurance is taken to insure against loss of profits of the company, per Section 10(3).

Gains from employment are taxable under Section 10(1)(b) unless exempted under Section 13(1)(i) of the Income Tax Act*.

Where there is no contractual obligation to pay the employee but the employer decides to on-pay the employee, the insurance payout will be taxed as additional remuneration in the hands of the employee.

Capital

Capital receipts are not taxable; hence insurance payout moneys received from realisation of a capital asset are not taxable.

Capital receipts are not taxable.

Where the employee is the intended beneficiary of the insurance policy and the insurance company pays the

  1. employer out of administrative convenience (the employer will then on-pay employee); or
  2. employee directly,
  3. the insurance payout is not taxable as it is received from the realisation of a capital asset.

* Sum received by way of death gratuities or as a consolidated compensation for death and injuries is exempted under section 13(1)(i).

Summary and Illustrations

The following scenarios illustrate the above principles:

 General scenariosTreatment of premium in the hands of

 

Treatment of payout by insurance company in the hands ofTreatment of payout which the employer pays to the employee by discretion

 

 

Employer

Employee

Employer

Employee

Employer

Employee

(A)

Employer is the beneficiary of the policy and there is no contractual obligation to on-pay the insurance payout to the employees

1

Employer pays premium on life or personal accident of employees (of whom none is a "keyman")

Not deductible

N.A.

Not taxable

N.A.

Deductible

Taxable

2

Employer pays premium on life of "keyman" to insure against profits arising from death/disability of persons whom the company has an insurable benefit

Deductible

N.A.

Taxable

N.A.

Deductible

Taxable

(B)

Employees are the beneficiaries or have the contractual right 3 to the insurance payouts from a group insurance policy

3

Employer pays premium on life or personal accident of employees

Deductible

Taxable

N.A.

Not taxable

N.A.

N.A.

4

Employer pays the premium but elects not to claim tax deduction on the premium under the administrative concession

Not deductible

Not taxable

N.A.

Not taxable

N.A.

N.A.

(C)

Work injury compensation insurance

5

Work injury compensation insurance where employer pays for the premium for the work injury compensation policy

Deductible

N.A.

Taxable

N.A.

Deductible

Taxable unless exempted under section 13(1)(i) of the ITA 4

(D)

Group medical insurance

6

Employer is the policy holder and pays for the premium of the medical insurance. As the medical insurance is provided in lieu of medical reimbursement to employees, insurance payout by the insurance company will be used to reimburse the employee's medical cost.

Deductible 6

N.A.

Taxable

N.A.

Deductible

Not taxable

7

Employer pays for the premium but the employees are the named beneficiaries where insurance company will make a payout to employees directly.

Deductible 6

Not taxable w.e.f YA 2008 under administrative concession 5

N.A.

Not taxable

N.A.

N.A.

3 Contractual right communicated to employees via employment contract or staff handbook and staff can sue employer for compensation payment.

4 Sum received by way of death gratuities or as a consolidated compensation for death and injuries.

5 Medical insurance provided in lieu of medical cost that would have been reimbursed by employers and benefit is available to all staff.

6 The medical insurance premium paid will form part of the medical expenses, which will be deductible subject to the relevant capping.

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