Partnership Insurance

Definition

A partnership is a business jointly owned by multiple parties, but it is not a corporate entity. In the event of a partner’s demise, financial issues may arise, such as the inability of the surviving partners to buy out the deceased’s share. Partnership Insurance ensures business continuity by providing funds to handle such situations effectively.

Purpose

• Ensures that surviving partners have sufficient funds to buy out the deceased partner’s share.
• Prevents the entry of unwanted outsiders into the business.
• Provides financial security to the deceased partner’s family by settling their rightful share.

Eligibility & Policy Details

• All partners must be insured simultaneously.
• The insurance amount should be at least ₹6 lakhs and should not exceed the minimum capital contribution of any single partner.
• The partnership deed should include a clause stating that the firm is revocable in case of the demise of a partner.
• Nomination is not allowed.
• The policy term should not extend beyond the partner’s age of 70.

Documents Required

• Proposal form (F. No. 340).
• Attested copy of the partnership deed and supplementary partnership deed.
• Audited balance sheets and profit & loss accounts for the last three years.
• Income tax returns of the firm for the preceding three years.
• Attested copy of the firm’s balance sheet containing the schedule of the partner’s capital account.
• Letter of authority in favor of the partner signing the proposal.

Taxation & Financial Considerations

Under Section 37(1) of the Income Tax Act (1961), premiums paid for partnership insurance may be considered a business expense. However, proceeds from claims are treated as **taxable income** for the firm. If a firm wants to claim tax benefits, it must ensure that:

• The firm is both the proposer and the beneficiary.
• The objective of the insurance (protection against loss of profit due to withdrawal of capital) is clearly documented.
• The sum assured is proportionate to the expected financial loss.
• The policy is kept unassigned.

Special Notes

• Policies can be taken at different times, provided a deed of variation justifies why certain partners were not insured earlier.
• The firm’s sum assured is usually equivalent to the total capital contribution of the partners, with goodwill added based on business size, nature, and profitability.
• Policy documents must include all partners' names, and the nominee section under Section 39 of the Insurance Act must be removed.