The deduction turns on the firm’s business protection
CBDT Circular 38/2016, dated 22 November 2016, accepts that premium paid by a firm on a partner’s Keyman Insurance Policy to safeguard the firm against disruption of its business is admissible under section 37 of the Income-tax Act, 1961. The insured person being a partner rather than an employee is therefore not, by itself, a reason to reject this deduction. This article concerns the premium working for FY 2025–26, AY 2026–27. It does not determine the tax treatment of policy proceeds or assignment.
Read the applicable text: CBDT Circular 38/2016: partner Keyman premiums Income Tax Department: objective, scope and transition FAQs.
Read the circular’s actual conclusion
Paragraphs 3–6 connect the partner’s role with protection of the partnership business. Paragraph 7 addresses departmental appeals on that settled issue. The circular does not say that every insurance payment appearing in a partnership ledger qualifies. Establish the identity of the policyholder, insured partner and economic beneficiary from the complete policy, proposal and endorsements. A narration saying Keyman cannot replace those documents.
Why the year label matters
AY 2026–27 relates to income earned during FY 2025–26. The Income Tax Department’s transition guidance identifies this return as governed by the 1961 Act even though filed after 1 April 2026. Retain the AY and financial-year labels in the working paper; do not transplant a new Act section number into this earlier-year deduction file. The historical circular is the direct authority for the partner-premium issue considered here, rather than a general statement about all later tax years.
Create one policy-level population
Use policy number as the primary identifier and separately record policyholder, insured partner, commencement, premium period, receipt number, payment reference, endorsements and refunds. Match the bank payment with the insurer’s acknowledgement and the general ledger. Explain the partner’s operational, commercial or technical role and why loss of that role would disrupt the firm. Keep contemporaneous business reasoning rather than a generic description copied across policies.
Separate personal insurance and mixed transactions
If the firm paid a personal policy belonging to a partner, identify that separately and examine its actual legal and accounting treatment. The partner-premium circular does not turn that payment into business protection merely because the firm funded it. Equally, a missing document is an evidence gap, not proof that no deduction can ever be established. Mark unresolved items for resolution before the computation is finalised.
Reconcile the expense before considering the deduction
Remove duplicate postings, trace refunded premiums and distinguish current-year entries from earlier-year claims. The examples below assume that the qualifying amount belongs to the current period and that any illustrated refund reversal is required in that same period. The circular does not itself supply a universal accrual, advance-premium or refund-year rule. Where payment, coverage and accounting periods differ, determine the timing separately under the applicable facts and tax provisions.
Do not confuse premium deduction with receipt exemption
The reason for allowing an outgoing is not a ruling that maturity, surrender, death proceeds or assignment will be exempt. Keep a separate proceeds and assignment file, including the complete policy history and any changes in ownership or beneficiary. Do not carry a premium-stage conclusion into section 10(10D) or a receipt-stage computation without checking the provisions applicable to that receipt.
Finish with an explained computation bridge
The final schedule should show ledger expense, duplicate or non-current entries removed, personal or unresolved amounts separately identified, reconciled business-protection premium and the supported tax treatment. Record whether the computation already starts from a profit figure containing that expense: a deductible expense already deducted in the books is not automatically an additional second deduction. Preserve the circular, evidence and reviewer’s actual conclusions without inventing a personal review certification.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Two supported partner policies
A firm has two current-period policies protecting its business against disruption, with verified premiums of ₹1,20,000 and ₹80,000. The supported population is ₹1,20,000 + ₹80,000 = ₹2,00,000. The file contains both policies and receipts; the total is not a second deduction if already charged in the starting profit.
Illustrative example 2: Separate a personal policy
The ledger contains ₹1,50,000 for a documented business-protection Keyman policy and ₹60,000 for a partner’s personal policy. Total booked expenditure is ₹2,10,000. Only ₹1,50,000 is supported by the Keyman analysis; ₹60,000 requires separate treatment and cannot be justified by relabelling it.
Illustrative example 3: Reconcile a same-period refund
Assume a ₹2,00,000 premium entry and a ₹25,000 insurer refund both require recognition in the same current-period expense working. Net expense is ₹1,75,000. Claiming the gross amount without considering the refund overstates this working by ₹25,000; a refund belonging to another tax period needs its own timing analysis.
Illustrative example 4: Remove a duplicate receipt
A single ₹1,80,000 premium receipt was posted twice, producing a draft expense of ₹3,60,000. Removing the duplicate reduces the population by ₹1,80,000 to ₹1,80,000. Two accounting entries do not evidence two insurance payments.
Illustrative example 5: Evidence gaps within a portfolio
Three current-period premiums are ₹1,00,000, ₹75,000 and ₹25,000. The first two have complete business-protection evidence; the third remains unresolved. The ₹2,00,000 ledger population divides into ₹1,75,000 supported and ₹25,000 requiring investigation. This is a preparation status, not an automatic statutory disallowance rule.
Illustrative example 6: Keep prior claims outside the current total
A reconciliation combines ₹2,40,000 of verified current-period premium with ₹60,000 already claimed for the previous period. The combined data extract is ₹3,00,000, but the current population is ₹2,40,000. The earlier ₹60,000 remains in the historical column and is not claimed again.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the relevant year | FY 2025–26 / AY 2026–27 computation heading and applicable-law note. |
| 2 | Identify every policy | Policy numbers, complete contracts and endorsements. |
| 3 | Confirm the firm’s interest | Policyholder, beneficiary and funding evidence. |
| 4 | Explain the partner’s business role | Contemporaneous business-protection rationale. |
| 5 | Separate personal cover | Partner account and personal-policy review. |
| 6 | Match premiums to payments | Insurer receipts, bank references and ledger entries. |
| 7 | Resolve refunds and duplicates | Credit notes, cancellations and duplicate-entry report. |
| 8 | Determine period treatment | Coverage, payment dates and accounting/tax timing memorandum. |
| 9 | Reconcile the tax bridge | Starting profit, expense already included and final treatment. |
| 10 | Preserve the authority and open issues | Circular 38/2016, evidence index and unresolved-item sign-off. |
Sixteen practitioner FAQs
1. Must the insured partner be an employee?
The circular accepts that Keyman cover is not confined to employees and addresses a partner connected with the firm’s business.
2. Does partner status itself defeat the expense?
No. The circular accepts the business-protection premium in the circumstances it describes.
3. Is the word Keyman in the ledger sufficient?
No. Check the actual policy and the firm’s business interest.
4. What business rationale should be recorded?
Explain how disruption caused by loss of that partner’s role affects the firm, with facts specific to its operations.
5. Which documents identify who owns the policy?
The policy schedule, proposal and later endorsements should be read together.
6. Does the firm’s bank payment prove all conditions?
It proves funding, subject to reconciliation; it does not by itself establish business purpose or policy terms.
7. Can a personal policy be treated as Keyman through a journal entry?
A journal entry cannot change the underlying policy rights or establish missing business-protection facts.
8. Is a missing receipt an automatic final rejection?
It is an evidence gap to investigate. Seek insurer confirmation and resolve the actual payment before finalisation.
9. Does the circular prescribe a percentage cap on premiums?
It does not prescribe a premium-percentage formula for this settled partner-policy issue.
10. Are all advance premiums deductible in the payment year?
The circular does not provide a blanket timing rule. Analyse the relevant period and applicable provisions separately.
11. How should cancellations be handled?
Trace the insurer’s cancellation and refund documents and determine the correct expense and tax periods.
12. Why retain prior-year columns?
They prevent a historical premium or claim being imported into the current deduction population again.
13. Is a deduction added again below book profit?
Only an appropriate computation adjustment is made. An expense already deducted in the starting profit must not be deducted twice.
14. Does this article establish that policy proceeds are exempt?
No. Receipt and assignment consequences require their own applicable-law review.
15. Why use section 37 for AY 2026–27?
The return relates to FY 2025–26 under the 1961 Act; the circular expressly identifies section 37 for the issue discussed.
16. Does the circular eliminate factual review?
No. Its accepted legal position should be applied to a reconciled policy file demonstrating the stated business-protection facts.
Official sources
CBDT Circular 38/2016: partner Keyman premiums Income Tax Department: objective, scope and transition FAQs