The Central Board of Direct Taxes (CBDT) has issued new guidelines for tax exemptions under the amended section 10 (10D) of the Income Tax Act, 1961, which makes the maturity amount of life insurance policies taxable if the annual premium exceeds Rs 5 lakh.
Under the previous rules specified in section 10 (10D) of the Income Tax Act, 1961, a life insurance policy’s maturity amount, including bonuses, was tax exempt.
However, the amendment to Clause (10D) of section 10 of the Income Tax Act, 1961, in the Finance Act, 2023, stipulated that the maturity sum received from life insurance policies issued on April 1, 2023, or after, will be taxable if the yearly premium exceeds Rs 5 lakh.
Also, in the case of more than one policy, the same rule will apply if the total premiums exceed Rs 5 lakh in a year. Therefore, the maturity amount from all policies combined will be taxable.
Let us get into the details.
While the new tax rule for life insurance policies is applicable from FY2023-24 (the assessment year 2024-25), the government on Wednesday notified exceptions in certain cases. An exemption will be allowed if the aggregate premium of the policies does not go beyond the limit in any of the years during the policy terms.
For instance, for life insurance policies issued in FY2023-24, the tax exemption will be applicable only when the aggregate annual premium paid is up to Rs 5 lakh. Beyond this limit, the maturity proceeds will become taxable as per the policyholder’s tax slab.
Says CA Abhishek Rana, Partner at AAAR & Associates: The proceeds from the insurance policy will be taxable under ‘Income from other sources’ under section 56 of the Act.
Here are the two exemptions notified in the amended taxation rule.
The only condition where tax exemption can be availed of on the proceeds received is in the case of policyholder’s death.
The other condition is if the life insurance policy is not a traditional policy but a unit-linked insurance plan (ULIPs). ULIP plans will not come under the purview of the changes.
Usually, risk-averse people invest in traditional insurance plans instead of ULIPs, which offer insurance and investment in a single product. But with the updated guidelines, the traditional insurance plans would no longer be attractive for policyholders.
Experts say this rule may not favour the life insurance business as it will make traditional insurance policies, like endowment, money-back, retirement plans, etc., less attractive in taxation. Rana concludes, “This notification will impact the tax planning which was being availed of through the purchase of LIC policies with investment objectives”.