Circular on Taxation of Life Insurance Receipts

Finance Act, 2023 had amended Section 10(10D) of the Income Tax Act(“Act”) to provide that in case of new policy/ policies taken up on or after 1^st April 2023, if the amount of premium paid in any year during the term of the policy/policies exceeds Rs. 5,00,000/- then the amount received on maturity shall not be exempt u/s 10(10D).

 

The above amendment shall not apply in case amount is received on the death of the insured person.

 

Further section 56(2)(xiii) was inserted to provide that the difference between the proceeds received from a LIC policy which is not exempt u/s 10(10D) and the premium paid is taxable as Income from other sources.

The premium paid should not have been claimed as a deduction during the duration of the policy under any provisions of the Act.

 

The Central Board of Direct Taxes vide Notification No. 61/2023 dated 16-Aug-2023 (attached) have prescribed the manner of computation of Income u/s 56(2)(xiii) by inserting Rule 11UACA.

 

As per the rule, the Income u/s 56(2)(xiii) is to be calculated as under:

1. When amount is received for the First Time under a policy which is not exempt u/s 10(10D) during the year: A-B

• A = Amount received during the year
• B = Premium paid till the date of receipt of amount for the First Time and not claimed as deduction in any earlier period under any provisions of the Act.

2. When amount is received in the subsequent years under a policy which is not exempt u/s 10(10D) during the year: C-D

• C = Amount received during the subsequent year
• D = Premium paid till the date of receipt of amount in the subsequent year and not claimed as deduction in any earlier period under any other provisions of the Act & is not claimed as deduction under section 56(2)(xiii).

 

A Simple case study to enter the taxation is given below:

• A person “X”, takes a LIC Policy on 1^st April 2023 with a sum assured of Rs. 75,00,000/- for 10 years with an annual premium of Rs. 6,00,000/-.
• The maturity proceeds is 90,00,000/- would be paid in 2 installments of Rs. 75,00,000/- at the end of 9^th Year & Rs. 15,00,000/- at the end of 10^th Year
• The premium paid is not claimed as deduction in any of the years.
• The Taxation u/s 56(2)(xiii) for the 2 years would be as under:

• Ninth Year

• Amount Received = Rs. 75,00,000/-
• Premium paid = Rs. 54,00,000/- (Rs, 6lacs * 9 Years)( Premium paid for 9 years and not claimed as deduction under any provision of the Act)
• Amount taxable = Rs. 21,00,000/-

• Tenth Year

• Amount Received = Rs. 15,00,000/-
• Premium paid = Rs. 6,00,000/- (Rs, 6lacs * 1 Year)(i.e., premium paid for the 10^th year and not claimed as a deduction earlier u/s 56(2)(xiii)
• Amount taxable = Rs. 9,00,000/-

• Therefore, the amount taxable for the 9^th Year is Rs. 21,00,000/- and for the 10^th Year is Rs. 9,00,000/-