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No more exemption to Life Insurance Policies above Rs. 5 Lakh
“Collect taxes from a taxpayer just like a bee collects honey from a flower without disturbing its petals.” – Chanakya in Arthashastra
Every year changes are effected in the Income Tax Law and the scope of exemption and deduction are getting curtailed. The tax needs to be collected on the basis of ability to pay the tax. With this in mind, the exemption is proposed to be removed for high-ticket life insurance policies. Let us know about it:
Presently, Section 10 (10D) provides for income-tax exemption on the sum received under a life insurance policy (including bonus on such policy) subject to the condition that premium payable for any of the years during the terms of the policy doesn’t exceed 10% of the actual capital sum assured.
Last year amendment by the Finance Act-2021 on ULIP Policies:
By Finance Act-2021, the restriction was placed on the tax exemption of Unit Linked Insurance Plan (ULIP) issued on or after 01.02.2021. It is provided that the sum received shall not be exempt if the amount of premium payable in any of the previous years during the term of such policy exceeds Rs 2,50,000/-. Only exception is if it is received on death of a person by the legal heir. It is also provided that if premium is payable for more than one ULIPs issued on or after the 01.02.2021, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 2,50,000/- for any of the previous years during the term of any of the policy. Circular No 02 of 2022 dated 19.01.2022 was issued to explain how the exemption is to be calculated when there is more than one policy. All other kinds of life insurance policies are still eligible for exemption irrespective of the amount of premium payable.
New amendment to remove the Tax Exempt Status of other Life Insurance Policies:
- Union Budget -2023 has now proposed to tax income from insurance policies (other than ULIP for which provisions already exist for investment above Rs. 2.50 Lakh) having premium or aggregate of premium above Rs 5,00,000/- in a year. Income is proposed to be exempt if received on the death of the insured person. This income shall be taxable under the head “Income from Other Sources”. Deduction shall be allowed for premium paid, if such premium has not been claimed as deduction earlier. The proposed provision shall apply for policies issued on or after 1st April, 2023.There will not be any change in taxation for policies issued before this date.
- To give effect to above, it is proposed to amend the Act so as to-
(i) Insert a new proviso (sixth proviso) to clause (10D) of the section 10 to provide that nothing contained in this clause shall apply with respect to any life insurance policy (other than a unit linked insurance policy) issued on or after the 1st April, 2023, if the amount of premium payable for any of the previous year during the term of such policy exceeds five lakh rupees;
(ii) Insert a new proviso (seventh proviso) to clause (10D) of section 10 of the Act to provide that if the premium is payable by a person for more than one life insurance policy (other than unit linked insurance policy), issued on or after the 1st April, 2023, the provisions of this clause shall apply only with respect to those life insurance policies (other than unit linked insurance policies), where the aggregate amount of premium does not exceed the amount referred to in the sixth proviso in any of the previous years during the term of any of those policies;
(iii) Amend the existing sixth proviso (new proposed eighth proviso) to clause (10D) of section 10 of the Act to provide that the provisions of the fourth, fifth, sixth and seventh provisos shall not apply to any sum received on the death of a person;
(iv) Insert clause (xiii) in sub-section (2) of section 56 of the Act to provide where any sum is received (including the amount allocated by way of bonus) at any time during a previous year, under a life insurance policy, which is not exempt under clause (10D) of section 10 of the Act, the sum so received as exceeds the aggregate of the premium paid during the term of such life insurance policy shall be chargeable to income-tax under the head “Income from other sources”. If the premium paid had been claimed as deduction in any other provision of the Act such premium will not be reduced from the sum so received. Computation mechanisms shall be prescribed.
- This would not apply to ULIP or Keyman insurance policies whose taxation is governed by other existing provisions of the Income Tax Act.
- To track the taxability of such transactions, section 194DA provides for deduction of tax @ 1% (20% if no PAN) of sum paid under a life insurance policy which is not eligible for exemption u/s 10(10D)if aggregate sum paid in a financial year is Rs. 1 Lakh or more. In short, if the TDS credit statement (Form 26AS) of the taxpayers reflects TDS U/s 194DA, one can be sure that amount is taxable. However, one needs to carefully note that Rs. 1 Lakh limit is there for TDS u/s 194DA & not for 10(10D).
India is considered as the fifth largest life insurance market in the world’s most emerging insurance sector, growing @ 32- 34% each year. Awareness has increased post covid-19 pandemic & people started investing heavily over it. The tax free status on maturity may be one more factor for its growth. The question arises as to whether the proposed amendment would discourage insurance as a tool of family protection. In my view, no as building an insurance portfolio may not require big premium policies. Term insurance can serve the purpose as well. In a Memorandum to the Finance Bill, 2023, the logic behind taxing the amount of high value policies is very well explained wherein it is mentioned that the exemption U/s 10 (10D) is intended to provide benefit to small and genuine cases of life insurance coverage. However, over the years, it is observed that several high-net-worth individuals misuse the exemption by investing in policies having large premium contributions to avoid tax. The intention of the Government is to curb the exemption provided in Section 10(10D) of the IT Act by investing in policies having large premium contributions and claiming exemption. Hence, the proposal to tax the high value insurance policies is sure to affect the HNI & not the middle class.
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CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
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