Employee Retention Scheme

In certain businesses talented and efficient Employees are the basic necessity of the
Employer. In such industries to find good employee is a big problem and their retention is
even a bigger problem.
Talented officials change jobs very often. When a talented employee leaves the organization
suffers for a while till they get a suitable replacement.
Employers wish to retain the talented employees to insure growth of business without
interruption and more importantly for their peace of mind.
Some of the typical examples of Industries/Individuals which are affected due to talented
employees leaving them:
1.
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3.
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5.
6.
7.

Software Industry.
Service Industry.
Accountants.
Liaison Officers.
R & D Industry.
Project Engineers.
Jewellery Makers. Etc.

To identify the Prospects following two things are necessary:

1. Dependency of organization/employer on skills and knowledge of the employee.
2. Employer feels the Need of such talented person to complete the Project or R & D work
or to insure profitability.
Increasing the salary is temporary solution, as after gaining experience every employee gets
better job offers from same industry. So fear always remains in the mind of employer about
employees leaving the job and joining competitors or even starting their own business.
In such type of businesses employer wish that employees remain with them for longer
period say 10 to 15 years. But question arises whether employee will be ready for that. One
of the solutions is if employer offers good lump sum amount apart from regular
employment benefits payable, then chances of employee agreeing to work for longer
duration are more. Almost 95% of people have their own selling price in mind.
In such cases employer will make an agreement with employee through employment
contract. In this agreement he expects the following things:
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1. A longer tenure of service from employee.

2. To pay a good sum/annuity to employee at the end of the tenure rather than during his
tenure in the job.
3. If employee fails to complete the tenure, then employer should not make any additional
payment.
The payment at the end of the tenure is always conditional, which may tempt the employee
to complete the tenure of service as per contract. By this employer is assured of services of
the employee for specified period and Employee is assured of additional lump sum
amount/annuity for binding himself to work with company for specified period.
But employee also expects following things:
1. Guarantee of the money to be paid after specified period, without going in for any
litigation if employer fails to pay the amount.
2. Protection for family in event of his/her death during the contract period.
LIC policy on the life of employee under Employer- Employee Scheme will provide the
necessary solution to above expectations of both employer and employee. Conditional
assignment of policy will provide the necessary solution (Refer CRM circular 852 dated
17/12/20120). If employee serves for the term, he will get the maturity amount (which will
be as per agreement amount) and in case of his early death his family will get the death
claim amount. In case employee resigns in between policy will revert to employer.
In such case employer makes an agreement with the employee and will provide necessary
amount every year to create the fund required as per contract. The above fund amount can
be utilized to purchase LIC policy on the life of employee as desired by the employee.
However it is necessary to establish reasonability of premium. The premium amount should
be calculated as per sinking fund formula.

Procedure for LIC Proposal:

1. Propose under Employer Employee Insurance under Form 340.
2. Under Employer Employee Questionnaire Reply following questions as given below:
i) What is object of Insurance: To provide contractual sum to employee as per
employment agreement.
ii) Restriction of Loan, surrender etc: Loan can be taken with consent of life assured.
iii) Conditions of assigning the policy to life assured: Yes as per Conditional assignment
as per CRM Circular dated 17/02/2012 and agreement with employee.
iv) Authorised Person to sign: Resolution attached.
3. Attach Copy of Agreement between Employer and Employee.
4. Attach P/L and balance sheet of company for last 3 years.
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5. Consent letter for agreement to be part of policy contract.

6. Attach copy of Resolution about finalization of contract, purchasing of policy and names
of person authorised.
For preparing draft of employment contract company C.A should be involved. Employment
contract can be made to suit the benefits payable under the Policy. e.g:
One can provide for benefits in lump sum after specified period, as per policy term
available under Plan-814.
Benefits in lump sum after specified period and annuity for life time thereafter, to suit
the benefits of Jeevan Tarang.
If maturity amount is less than the agreement amount payable, balance will be paid by the
company and will be treated as business expenses for that year and if maturity amount is
more than agreement amount payable it will be treated as income of the company.

Tax Benefits:
1. Amount payable to the employee under the contract is not the expense of that
particular year in which payment is made to employee but the expenses of the whole
period of contract. Such amount of expenses should be treated as deferred expenses
and must get benefit in each year of contract as per sinking fund formula.
Premium Paid by employer is to create the fund/ retirement corpus payable to
employee to fulfil contractual obligation and will be treated as deferred expenses and
qualify for business expense under section 31 to 34 or under section 37(1). Policy
surrender/maturity proceeds in the hands of employer will be taxable.
2. Premiums paid by employer will not be treated as a perquisite in the hand of employee,
because it is a contingency payment. Benefit will vest in the hand of employee only
when he completes the period of contract, otherwise benefits will revert to the
employer. There is one Supreme Court decision dated 01/04/1964 CIT vs L.W. Russel 53
ITR 91(SC).
3. Premiums paid will also be out of purview of fringe benefit tax.
4. At the end of term contract amount will be added to the income of employee. He can
claim the benefit of deduction if employment contract have the provision of VRS/
Retirement benefit.

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