Amendment for section 10(10D) and section 56(2)(xiii) by Finance ACt 2023

 

 

Sum received under life insurance policy (LIP)

As per the amendment under Section 10(10D) now if the premium paid during any previous year is more than 5 Lakhs, any sum received for life insurance policy issued on or after 1 April 2023 would no longer be eligible for tax exemption.

However, the above taxability not applicable in case of death of a person.

As per section 56(2)(xiii), any sum received under a life insurance policy is computed as taxable income however, the same is exempt if the following condition is satisfied:

1. If the same is exempt under section 10(10D)

• Where the premium payable should not exceed 10% or 15% (in case of severe disability or suffering from specified diseases) of the actual capital sum assured, for any of the years (during the term of the policy); or
• the sum is received on the death of a person; or
• if the amount of premium payable for LIP for any previous year during the term of policy does not exceed 5 Lakhs (where the policy is issued on or after 1 April 2023.2.   Unit linked insurance policy/ Keyman insurance policy.
  if the yearly premium of a ULIP plan purchased after 01 February 2021 exceeds Rs 2.5 lakh, then they will be subject to taxation, just like every other equity-oriented investment.

Below is the example:
Sum assured – 2 Crore
Annual premium – 21 Lakhs
Term: 12 years
Sum payable at time of maturity – 2.21 Crore

As the annual insurance premium paid is more than 10% of the assured amount and the annual premium exceeds 5 Lakhs exemption is not available under section 10(10D). So, at the time of maturity income will be calculated as per section 56(2)(xiii).

The purpose is to curb the misuse of Section 10(10D) of Income Tax Act with this proposal. “…over the years it has been observed that several high-net-worth individuals are misusing the exemption provided under Section 10(10D) of Income Tax Act by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies,” the memorandum explaining the provisions in the finance bill noted.