Two layers of employer death benefit, and why most firms only see one
When an employee dies, the death benefit their family receives from the employer comes from up to two distinct layers, and most Indian firms actively manage only the statutory one without realising the second exists as a choice.
The first layer is EDLI, the Employees' Deposit Linked Insurance Scheme run under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. Every establishment covered by EPF automatically provides EDLI, funded by a small employer contribution, and it pays a defined lump sum to the nominee on the death of a member while in service. It is a floor, not a designed benefit, and its cap is modest against what the death of an earning member actually costs a family.
The second layer is a voluntary group term life (GTL) policy, a one-year renewable life cover on the whole workforce that pays the sum assured to the nominee on death from any cause. This is where an employer can turn a statutory minimum into a benefit that means something. The connection between the two is the part most firms miss: the EPF Act lets an employer that runs a good enough GTL scheme apply to be exempted from EDLI and redirect that statutory contribution toward the GTL premium, so a much larger benefit can often be bought for a comparable outlay.
This piece sets out how EDLI actually works, how the exemption route replaces it, how to structure the GTL sum insured and free-cover limit, the tax treatment for employer and employee, and the nomination and claims discipline that decides whether the benefit reaches the family cleanly. Note at the outset that GTL is a life cover for death from any cause, which is a different product from a group personal accident policy that pays only on accidental death and disablement; a considered benefits stack usually carries both.
How EDLI actually works: the contribution and the Rs 7 lakh formula
EDLI is funded by the employer, not the employee. Against EDLI, the employer contributes 0.5 percent of monthly wages up to the EPF wage ceiling of Rs 15,000 per member, so the maximum EDLI contribution is a small figure per employee per month. There is no separate deduction from the employee's salary for it.
The benefit is set by a statutory formula rather than by the employer's choice. The assured sum is calculated as 35 times the average monthly wages of the preceding twelve months (the wages capped at Rs 15,000 for this purpose), plus a bonus, with the total benefit currently subject to a maximum of Rs 7 lakh and a minimum of Rs 2.5 lakh. In practice this means the family of a deceased EPF member receives a lump sum somewhere between those two figures, determined by the wage record, regardless of the employee's actual earnings above the ceiling.
The limitation is obvious once stated. A member earning well above the Rs 15,000 EPF wage ceiling, which is most salaried employees, has an EDLI benefit that bears no relationship to their real income. The scheme was built as a basic social-security floor attached to the provident fund, and it does that job, but it is not a considered death benefit for a modern workforce. For a family that has lost its earner, a maximum of Rs 7 lakh replaces a fraction of the income and obligations that death removed. That gap between the statutory floor and the family's real need is exactly what the exemption route and a properly sized GTL are meant to close.
The EDLI-exemption route: a better benefit for a comparable cost
The most useful and least used feature of the framework is that an employer is not obliged to keep the EDLI floor if it provides something better. Under Section 17(2A) of the EPF Act, an establishment may apply for exemption from EDLI where it maintains a group life insurance scheme that provides benefits at least as favourable as EDLI to its employees. Once exempted, the employer stops paying the EDLI contribution to EPFO and instead funds a group term life policy.
The economics are what make this attractive. The EDLI contribution buys a benefit capped at Rs 7 lakh. The same money, or a modest addition to it, directed into a group term life premium, buys sums assured that are multiples of that figure, because group term life is priced on the pooled mortality of the whole workforce and is efficient at scale. An employer with a young, office-based workforce can often secure a sum assured of several times annual salary per head for a premium in the region of, or not far above, the EDLI contribution it was already paying.
The exemption is a formal process: the employer applies, demonstrates that the alternative benefit is not less favourable than EDLI, and maintains the group policy as a condition. The scheme must genuinely be better on benefit for every class of employee, not just on average, which is a structuring point the sum-insured design has to respect.
Structuring the sum insured: flat, salary-multiple or grade-based
The design decision that determines whether a GTL scheme is a real benefit is the basis on which the sum assured is set, and there are three common approaches, each with a different fairness and cost profile.
A flat sum assured gives every employee the same cover, say a single figure across the whole workforce. It is simple to administer and easy to explain, but it either over-insures the lowest-paid relative to their income or, more often, is set low enough to be a token for the highest-paid. It also risks failing the EDLI-exemption test for senior employees whose flat benefit may not clearly exceed what a wage-linked EDLI calculation would have given.
A salary-multiple basis sets each employee's cover as a multiple of annual salary, commonly a few times earnings, so the benefit scales with the income it is meant to replace. This is the fairest structure and the one that best matches the purpose of a death benefit, because the payout tracks what the family actually loses. It requires the insurer to underwrite the spread of sums assured, which brings in the free-cover limit discussed next.
A grade or designation basis assigns a sum assured to each pay band or grade, a blend of the other two: fairer than a flat figure, simpler than a continuous salary multiple, and easy to align with an organisation chart. It works well for firms with clear grade structures and is common in manufacturing and services alike.
Whichever basis is chosen, the design should also decide how the benefit interacts with the rest of the stack, whether it is coordinated with gratuity and any group personal accident cover, and whether an accidental death produces a GTL payout, a GPA payout, or both. A well-structured scheme states these interactions explicitly rather than leaving the family and the HR team to discover them at claim.
Free-cover limits and when medical underwriting kicks in
The feature that makes group term life administratively workable is the free cover limit (FCL), and understanding it is central to structuring a scheme that does not bog down in medical tests.
The FCL is the level of sum assured up to which the insurer grants cover to each member without any individual medical underwriting, on the strength of the group being insured as a whole. Below the FCL, an employee is covered from the day they join the eligible class, with no health declaration, no tests and no delay. The FCL is set by the insurer based on the size of the group and the average sum assured, so a larger workforce generally attracts a higher FCL, and in many schemes the FCL is high enough that the great majority of employees are fully covered without ever being underwritten individually.
Medical underwriting enters only for the tail. An employee whose sum assured exceeds the FCL, typically a senior person on a high salary multiple, is covered up to the FCL automatically and must complete health requirements only for the amount above it. Until those requirements are met, cover above the FCL is usually not in force, which is a live gap for a newly joined senior hire and a point the HR team should track rather than assume is handled.
Tax treatment for employer and employee
The tax position of a group term life scheme is favourable on all three sides of the transaction, which is part of why it is an efficient way to deliver a death benefit, but the treatment should be confirmed with the firm's tax advisers against the current provisions rather than assumed.
For the employer, the premium paid on a group term life policy covering employees is generally allowable as a business expense, deductible in computing taxable income, because it is expenditure incurred wholly for the purpose of the business in providing a staff benefit. This is the same logic that makes group health and group personal accident premiums deductible.
For the employee, an employer-paid group term life premium is generally not treated as a taxable perquisite in the employee's hands, unlike some other employer-funded benefits, because the cover is a pure protection benefit on the group rather than an accretion to the individual's income or an asset they own. The employee gets the protection without a tax cost on the premium.
For the nominee, the death benefit itself is a life-insurance sum assured received on the death of the insured, which falls within the exemption for life-insurance proceeds and is generally received free of income tax. The family receives the full sum assured, not a figure net of tax.
The combined effect is that redirecting the EDLI contribution into a group term life scheme is tax-efficient at every step: the employer deducts the premium, the employee is not taxed on it, and the family receives the benefit tax-free. Because tax provisions and thresholds change, the sensible discipline is to have the specific scheme reviewed by the firm's advisers at inception and at any material change, so the treatment relied on is the treatment in force.
Nominations, claims administration and the CTA
A death benefit is only as good as the speed and certainty with which it reaches the right person, and in practice the failures here are administrative, not actuarial. The two things an employer must keep in order are nominations and claim readiness.
Nominations decide who receives the payout. Under a group term life scheme the employee nominates a beneficiary, and under EDLI the EPF nomination governs. These can diverge, and a stale or missing nomination is the most common cause of a delayed or disputed death benefit. The employer should collect and periodically refresh nominations, prompt updates on the life events that change them, marriage, children, divorce, and hold the records so that at claim there is no question who the benefit belongs to. A clean nomination is worth more to a grieving family than an extra lakh of sum assured tied up in a dispute.
Claims administration should be mapped before it is needed. For the GTL claim, the insurer requires proof of death, the claim form, and the nomination and identity documents, and pays the sum assured to the nominee. For any residual EDLI benefit, the claim runs through the EPF process on the prescribed form. The employer's role is to help the family assemble the paperwork quickly and to certify the employment and the sum assured, and a firm that has a documented process and a designated point of contact turns a distressing process into a manageable one.
Much of the design and comparison work, the sum-assured basis, the free cover limit each insurer will grant, the terms and exclusions of the group term life wording, and how the scheme meets the EDLI-exemption standard, depends on being able to see and compare insurer wordings rather than premium quotes alone. Sarvada gives commercial-insurance brokers and corporate HR and risk teams searchable access to insurer group life, group personal accident and group health wordings and the intelligence around them, so the benefit basis, free cover limits, exclusions and claims terms can be compared across insurers and the death-benefit stack structured to actually protect the workforce. Employers and the brokers designing these schemes can Request Access to evaluate the platform.