As per the revised income tax laws, effective from April 1, 2013, any proceeds of a keyman insurance policy are now fully taxable. The new rules also provide that a keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a keyman insurance policy and consequently would not be eligible for any exemption under section 10(10D) of the Income-tax Act. With the amendment to Section 10 (10D) of IT Act 1961 and IRDAI fiat of allowing only term insurance policies to be bought as Keyman insurance. The premium paid by the company buying the Keyman insurance policy is an allowable business expenditure for the company under section 37(1) of the Income-Tax Act. In case there is a claim (on death of the insured), the claim proceeds are taxable as business income in the hands of the company. The Keyman insurance policy death benefits are not tax-free under section 10 (10D) of the Income Tax.
There is no maturity or surrender benefit either to the company or to the Keyman as now only term policy can be bought as Keyman insurance and these policies do not have any surrender or maturity benefits.