CBDT notifies rules to calculate life insurance income where premium exceeds Rs.5 lakh
- The Central Board of Direct Taxes (CBDT) issued a notification no. 61/2023, on 16 August notifying new guidelines under Section 10(10D) of the Income Tax Act, 1961, prescribing a mechanism for calculating income from life insurance policies where the aggregate annual premium exceeds Rs.5 lakh.
- The CBDT has notified the Income Tax Amendment (Sixteenth Amendment), Rules, 2023, prescribing Rule 11UACA for calculating income concerning the sum received upon maturity of life insurance policies where the premiums exceed Rs.5 lakh and such policies are issued after 1 April 2023.
- As per the rules, the tax exemption on the maturity benefits under Section 10(10D) of the Income Tax Act for the policies issued after 1 April 2023 would be applicable if the aggregate premium paid is up to Rs.5 lakh a year.
- For premiums beyond Rs.5 lakhs, the maturity proceeds will be added to the individual’s income and taxed at the applicable rates. This change in the tax provision of life insurance policies, except Unit Linked Insurance Policy (ULIP), was announced in the Union Budget 2023-24.
- According to the CBDT notification, Section 10(10D) of the Income Tax Act provides income tax exemption on the amount received under a life insurance policy, including the amount allocated through a bonus on such a policy subject to certain exclusions.
- From the assessment year 2024-25, the amount received under a life insurance policy issued after 1 April 2023 (other than a ULIP) will not be exempt under Section 10(10D) of the Income Tax Act when the premium amount payable for any of the previous years during the term of the policy exceeds Rs.5,00,000.
- The CBDT guidelines regarding the sum received upon maturity of life insurance policies are elaborate and provide examples on the computation of the eligible exemption. However, the taxation provision for the sum received on the death of an insured is not changed and is exempt from income tax.