The Finance Act of 2023 brought about significant changes in the taxation of life insurance policies in India, particularly concerning exemptions related to insurance premiums exceeding ₹5 lakhs. This amendment, as clarified by the Central Board of Direct Taxes, has important implications for policyholders. Here, we will delve into how these exemptions for insurance policies work and explore the scenarios in which they apply.
Amendment to Section 10(10D)
The recent amendment to section 10(10D) of the Income Tax Act, 1961, has eliminated the exemption previously available for sums received from life insurance policies if the aggregate premium for all policies issued on or after April 1st exceeds ₹5 lakhs. This change is significant and requires a closer examination to understand its implications.
Aggregate Premium Calculation
One of the key aspects of this amendment is calculating the aggregate premium. Suppose a policyholder has multiple life insurance policies issued on or after April 1st. In that case, the exemption under section 10(10D) will only apply to those policies for which the aggregate premium does not exceed ₹5 lakhs for any of the previous years during the term of those policies. This means the cumulative premiums paid for all policies must stay below ₹5 lakh per year.
Case Study: Jayesh’s Scenario
To illustrate this concept, consider Jayesh, who holds two insurance policies – A and B. Policy A was issued on April 1, 2032, with an annual premium of ₹5 lakhs for 10 years. On April 1, 2033, he purchased policy B with a similar premium structure. On maturity, he receives ₹50 lakhs from policy A and ₹60 lakh from policy B. Both amounts are exempt from taxation since the aggregate annual premium for policies A and B never exceeded ₹5 lakhs during their terms.
Exemptions for ULIPs
It’s important to note that the above amendments do not apply to unit-linked insurance policies (ULIPs). Premiums for ULIPs are not subject to the ₹5 lakhs limit, but the surrender value may not be exempt if the annual premium is less than ₹2.5 lakhs during the policy term.
Case Study: Rekha’s Portfolio
For instance, Rekha holds multiple life insurance policies and ULIPs. Her ULIP X surrender value is not exempt because the annual premium falls below ₹2.5 lakh. However, the consideration received under life insurance policy A in the previous year, 2033-34, is exempt. Rekha should carefully analyze whether to claim the exemption for policy A, as it affects the taxability of policy C in the following year. Policy C could become more beneficial if she does not claim the exemption for policy A.
Exemption on Sum Received on Death
It’s worth noting that the provisions for taxability of consideration from insurance policies with premiums exceeding ₹5 lakhs do not apply to sums received on the insured person’s death. Term life insurance policies, for example, provide a tax exemption on the policy amount paid to the nominee in case of the insured person’s death during the policy term. Additionally, premiums paid for such policies are not considered when checking the ₹5 lakhs limit.
Conclusion
In conclusion, the recent amendments to section 10(10D) of the Income Tax Act have brought about significant changes in the taxation of life insurance policies in India. Policyholders must carefully assess their insurance portfolios and premium payments to ensure compliance with the new regulations. Understanding these exemptions is crucial for making informed financial decisions and optimizing tax benefits.
