The Income Tax Department introduced new rules for calculating income proceeds from life insurance policies where the annual premium exceeds Rs 5 lakh. The Central Board of Direct Taxes (CBDT) has issued the Income Tax Amendment (Sixteenth Amendment) Rules, 2023, which introduces rule 11UACA.
This rule pertains to the calculation of income upon maturity of life insurance policies issued on or after April 1, 2023, with premium amounts exceeding Rs 5 lakh.
Under the new provision, policies issued on or after April 1, 2023, will only qualify for tax exemption on maturity benefits under Section 10(10D) if the total aggregate premium paid by an individual does not exceed Rs 5 lakh annually. For policies with premiums beyond this limit, the maturity proceeds will be treated as part of the individual’s income and will be subject to taxation based on applicable rates.
This change in tax regulations, excluding Unit-Linked Insurance Policies (ULIPs), was introduced in the Union Budget 2023-24.
The primary goal of this provision is to counteract tax advantages associated with investments masked as insurance policies.
AMRG & Associates Joint Partner (Corporate & International Tax), Om Rajpurohit while speaking to news agency Press Trust of India (PTI) explained that any surplus amount received upon maturity of such policies would be considered taxable under the “income from other sources” category.
AKM Global Tax Partner, Amit Maheshwari, stated that this provision aims to eliminate tax benefits exploited through investments disguised as insurance policies.
To facilitate this transition, CBDT has issued comprehensive guidelines that provide various examples for computing consideration eligible for exemption.
It’s important to note that the tax provisions for the amount received upon the death of an insured individual remain unchanged and continue to be exempt from income tax. The circular issued by the CBDT clarifies that if any sum, including bonus amounts, is received during a previous year under a life insurance policy (excluding unit-linked insurance policies), and this sum is not excluded from the total income according to the provisions of clause (10D) of section 10, the surplus amount beyond the aggregate premiums paid during the policy term, not claimed as deductions elsewhere, will be subject to income tax under the “Income from other sources” category.
Furthermore, the CBDT has introduced a new sub-clause (xviid) in clause (24) of section 2, indicating that income shall encompass sums mentioned in clause (xiii) of sub-section (2) of section 56.
In conclusion, the new tax rules for life insurance policies with high premiums are designed to ensure that genuine insurance benefits are provided, curbing the potential misuse of tax advantages through disguised investments. The guidelines issued by CBDT aim to alleviate any difficulties arising from the implementation of these provisions. It’s crucial to understand that exemptions under the new rules will be contingent upon the satisfaction of other provisions in the Act.