Finance
The Central Board of Direct Taxes (CBDT) has published new recommendations under Section 10(D) of the Income Tax Act of 1961. Section 10(D) of the IT Act provides for income-tax exemption on any money received under a life insurance policy, including any bonus allocated under such policy. Such an exception, however, is subject to certain limitations.
The CBDT instructions follow the Finance Act 2023, which withdrew tax exemption from any cash received from life insurance contracts with aggregate yearly premiums above Rs 5 lakh.
What Finance Act 2023 changed
1. Premium paid for a single policy: According to Finance Act 2023, any sum received under a life insurance policy, other than a unit-linked insurance policy, issued on or after 1 April 2023 is not exempt under Clause 10(D) of Section 10 of the IT Act if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 5 lakh. This will be effective in AY 2024-25.
2. Premium paid for multiple life insurance policies: For policies issued on or after April 1, 2023, the exemption under Clause 10D will not be applicable for any policy whose total annual premium exceeds Rs 5 lakh in any year during the policy term.
“if premium is payable for more than one life insurance policy, other than a unit linked insurance policy, issued on or after 01.04.2023, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 5,00,000 for any of the previous years during the term of any of those policies,” CBDT said.
However, the exemption will be available for any amount paid as a premium in case of the death of the policyholder and in case of term insurance plans as well.
The Finance Act 2023 also inserted a new clause (xiii) in sub-section (2) of section 56. According to this clause, any amount received as a bonus from a life policy in a previous year will be chargeable to income tax under the head “income from other sources”.
The CBDT said such bonus amount “is not to be excluded from the total income of the previous year in accordance with provisions of clause (10D) of Section 10.”
“…the sum so received as exceeds the aggregate of the premium paid, during the term of such life insurance policy, and not claimed as deduction in any other provision of the Act, computed in the manner as may be prescribed shall be chargeable to income-tax under the head ‘Income from other sources’,” CBDT said.
New Guidelines
The CBDT has released new recommendations for the execution of the aforementioned Finance Act 2023 provisions. “Consideration received during the previous year under an eligible life insurance policy shall be exempt or not exempt under clause (100) of section 10 of the Act, subject to the satisfaction of other provisions of said clause,” the CBDT stated in an August 16, 2023 circular. The CBDT’s rules state that exemption under clause 10D of Section 10 will be assessed in the following ways.
Situation 1: When the assessee received no consideration or sum in the prior year preceding the present previous year, or when consideration was paid on qualified policies but was not claimed exempt.
- If a sum or consideration is received for one policy during the current previous year and the amount of premium paid is less than Rs 5 lakh in any previous year during the term of the policy, the sum is eligible for exemption under clause 10D of section 10D, subject to the fulfillment of other conditions.
- If any sum has been received under one life insurance policy solely during the current prior year and the premium paid on this policy was more than Rs 5 lakh in any previous year then such sum will not be eligible for exemption under Clause 10(D).
- If a sum is received during the current fiscal year under more than one eligible life policy and the total premium paid on all such policies in any previous year is less than Rs 5 lakh, the sum is eligible for exemption under Clause 10(D), subject to the fulfillment of other conditions.
- If any sum has been received during the current previous year under more than one life policy and the aggregate premium paid on such policies in any previous year was more than Rs 5 lakh, the exemption will be available only for those policies for which the premium payable was less than Rs 5 lakh in any previous year during their term.
Situation 2: The assessee received any money or payment under any one or more qualified life insurance policies during any previous year before the present prior year and claimed exemption under clause (10D) of section 10 of the Act. In this instance, the exemption will be determined as follows:
- If any sum or consideration was received during the current previous year under only one eligible life insurance policy and the aggregate amount of premium payable on such eligible life insurance policy and old eligible life insurance policies did not exceed Rs 5 lakh, such sum under eligible life policies will be eligible for exemption under clause (10D), provided it is not excluded under sub-clauses (a) to (d) of said clause (l0D);
- If a sum is received during the current previous year under only one eligible life insurance policy and the aggregate amount of premium payable on such eligible life insurance policy and old eligible life insurance policies exceeds Rs 5 lakh for any of the previous years during the term of such eligible life insurance policy, then such sum is not eligible for exemption under clause (10D).
- If a sum has been received during the current previous year under more than one eligible life insurance policy and the aggregate of the amount of premium payable on such eligible life insurance policies and old eligible life insurance policies does not exceed Rs 5 lakh for any of the previous years during the term of such eligible life insurance policies do not exceed Rs 5 lakh for any of the previous years during the term of such eligible life insurance policies, then such sum will be eligible for exemption under the clause (10D), provided it is not excluded under subclauses (a) to (d) of clause (10D);
- If any sum was received during the current previous year under more than one eligible life insurance policy and the aggregate of the amount of premium payable on such eligible life insurance policies and old eligible life insurance policies exceeded Rs 5 lakh for any of the previous years during the term of such eligible life insurance policies, then the sum received from only such policy will be eligible for an exemption for which the aggregate amount of premium along with theaggregate amount of premium of old eligible life insurance policies do not exceed Rs 5 lakh in any of the previous years during the term of any of such eligible life insurance policies, provided it is not excluded under sub-clauses (a) to (d) of clause (10D).
GST to be exclusive of premium
The CBDT further said, “the premium payable/aggregate premium payable for a life insurance policy/ policies, other than a unit linked insurance policy, issued on or after the 1st day of April, 2023, for any previous year, shall be exclusive of the amount of the Goods and Service Tax payable on such premium.”
Source:FE
