Benefit of including Group Term Cover (GTC) in CTC.
Both the employer as well as the employee can save money by rejigging the salary and including the GTC i.e. Group Term Cover. Every employer wants to retain good employees to save money, time and effort but also to keep costs under control. Similarly, every employee wants a higher take-home pay and lower tax outgo. Evidently, both are working hard to do something beneficial for their kith and kin and society as a whole. The good news is that all these can be achieved if GTC is included in CTC structure.
Take a look at the Wins:
- Employee receives tax benefit over and above 80C and lowest insurance premium.
- The organization receives better retention and increased trust of the employee.
- The family receives much needed financial security without additional effort.
Group insurance and retirement products which are tax efficient and available to corporate can be broadly classified into:
- Group Superannuation Scheme
- Group Term Life Insurance
- Group Gratuity Scheme
- Leave Encashment Scheme
- National Pension Scheme – Latest addition
Employees retention can be increased by including the above long-term incentives including GTC in the compensation structure. These more money to employees but also make their by helping them in achieving long term goals systematically. In next few paragraphs we bring more clarity and reason to change the CTC structure as per tax laws and include GTC. Specially, after budget 2016, neither there has been increase in the any changes in the perquisites section. The CTC structure as per tax laws and include GTC. Specially, after budget 2016, neither there has been increase been any changes in the perquisites section.
Employee gets lowest premium and deduction over and above 80C. The premiums paid by their employers are not treated as perquisites. Employees under Section 10(10D).
Almost every employee would be paying insurance premium and loses true benefit of insurance, This could be due to:
1) Not receiving tax benefit on insurance premium due to 80C limit:
There are a number of employees who pay insurance premium but do not receive tax benefit under section 80 C, especially the ones in the higher income bracket. Because their EPF and tuition fees are also higher than the 80 C limit of Rs 150000/-, therefore, they can get the extra tax benefit through tax free perquisite.
2) Lower risk cover than required:
The employer should get term cover up to 8-10 times of salary for providing the necessary risk cover as flexible salary package component. People in India treat insurance as an investment rather than financial security option. This financial misconception can be dealt with to a great extent by providing the risk cover based on the income.
3) Higher premium for desired risk cover:
The premium for GTC is comparatively lower than the individual insurance. Moreover, the premium rates in past few years have has come down which makes it more important to even relook older policies premium at employee’s end and getting lower premium in comparison with GTC.
4) Lower cover and higher investment due to financial illiteracy:
Even after paying a higher premium the employees might not be getting the necessary risk cover due to type of policy i.e. investment instead of protection. Hence, the additional premium can be diverted to other tax saving options i.e. NPS, home loan etc.
Higher the age and income, more the tax benefit:
GTC increases tax saving by Rs 5000/- on premium of Rs 15000 for person having monthly salary of Rs 1 lakhs. Increase in tax saving by Rs 18000/- on premium of Rs 56000/- for person getting Rs 4 lakhs monthly and above 35 yrs. Increase in tax saving by Rs 25000/- on premium of Rs 78000/- for a person getting Rs 4 lakhs monthly and above 40 yrs. Term cover 5 Crores. Increase in tax saving by Rs 60000/- on premium of Rs 200000/- for a person getting Rs 4 lakhs monthly and above 50 yrs.
GTC helps in Statutory Compliance:
All establishments with at least twenty full time permanent employees and to whom the Employee’s Provident Fund and the Miscellaneous Provisions Act 1952, applies, have a statutory liability to subscribe to the Employee’s Deposit Linked Insurance (EDLI), to provide life insurance cover for all the employees.
However, under Section 17(2A) of the Act, the employer may be exempt from contributing to this scheme, if he/she has provided for better insurances benefits than the cover offered by the Employee Provident Fund Organization (EPFO) through a life insurer. Group Term Assurance Scheme in Lieu of EDLI is a better alternative since it provides greater benefits.
GTC helps in staying par with competitors:
In 2008, Infosys Technologies Ltd announced renewal of the group life insurance policy covering 97,000 employees with Life Insurance Corporation of India (LIC). This shows that the leading companies are actually providing the group term cover and now the others need to provide to compete. The benefits i.e GTC offered by corporate helps in job satisfaction of current employees and stay par with other corporate employees could be looking for. In foreign countries/companies the insurance is a key benefit and talent management tool and soon it will become in India. Thus, GTC helps in maintaining your position as employer of choice.
The Insurance coverage can be Uniform or Graded: Uniform cover means similar for all employees. Graded cover can be on the basis of 1) Rank, 2) Salary levels, 3) Cost to company, 4) Outstanding loan, 5)Liability amount 6) Size of bank deposit, 7) Future Service Gratuity of Gratuity Scheme, 8) Life Cover in lieu of Employee Deposit Linked Insurance (EDLI) scheme, 1976, Any other.
It is recommended to have insurance coverage on the salary level basis, flexible from 4 times to 10 times to be chosen by employee as per their financial needs. Add- on covers could also be provided as riders that insure for critical illnesses, accidental deaths, disabilities, etc. Avail Tax benefits by investments in such plans for your prime asset i.e. human resource. The contribution by the employer is deductible as a business expense. Additionally, these contributions are also not treated as a perquisite in the hands of the employee. From the employee’s perspective, benefits payable on death and the amount commuted on maturity are exempt from tax.
(As published in monthly newsletter of Allsec Technologies ‘Allsec SmartConnect’, June 2016 issue.)