CBDT vide Circular No. 15/2023 amended clause (10D) of section 10 of the Income-Tax Act, 1961.

[A]: Background:

The Finance Act 2023 made an amendment in Section 10(10D) which entails the following:

1. The maturity proceeds of the Life Insurance Policies/Endowment Policies issued on or after 01 April 2023, having annual premium in excess of INR 5 lacs in any year during the term of the policy, shall not be exempt;
2. Where the policyholder holds more than one Life Insurance Policy issued on or after 01 April 2023, the exemption shall be available in respect of the maturity proceeds in regard to those policies where the aggregate annual premium does not exceed INR 5 Lacs

   Further, the maturity proceeds (as discussed above) shall be taxed under the head “Other Sources” under section 56(2)(iii)

[B]: Circular No 15/2023 :

The circular clarifies the method to optimize the taxability of the maturity proceeds of the policies issued on or after 01 April 2023. The policyholder should first exhaust the INR 5 lac limit with those policies that have the higher amount of maturity proceeds in order to tax that policy that has the comparatively lower maturity proceed.

Example: Mr X holds the following Life Insurance Policies:

Life Insurance Policy	A	B	C	D	E
Date of Issue	1.04.2023	1.04.2023	1.04.2024	1.04.2024	1.04.2022
Annual Premium	1,00,000	1,00,000	1,50,000	6,00,000	5,00,000
Sum Assured	10,00,000	10,00,000	15,00,000	60,00,000	50,00,000
Consideration received on maturity	12,00,000	12,00,000	18,00,000	70,00,000	60,00,000
Exempt U/S 10(10D)	Yes	Yes	Yes	No	Yes
Remarks	Aggregate Premium of A, B, and C does not exceed INR 5 Lacs	Aggregate Premium of A, B, and C does not exceed INR 5 Lacs	Aggregate Premium of A, B, and C does not exceed INR 5 Lacs	Annual Premium exceeds INR 5 Lacs	Policy issued prior to 01.04.2023 thus, maturity proceeds shall not be taxable

 

Other Significant Points:

• The premium of INR 5 Lacs payable/aggregate premium payable for a life insurance policy/policies issued on or after 01.04.2023 shall be exclusive of the amount of the Goods and Service Tax payable on such premium
• In case of the maturity amount is received on the death of a person then such maturity proceeds shall be exempt from tax.
• The annual premium of the Term Life Insurance Policies shall not be considered for the purpose of aggregating annual premium of INR 5 Lacs

New Rule 11UACA:

This new rule notified under Income Tax Rule 1962 mentions the method to compute the taxable income under section 56(2)(iii) under the head “Other Sources”. If the maturity proceeds are received, the taxable income shall be calculated as follows:

1. For the first previous year in which the sum is received for the first time under the policy, the taxable shall be computed by using the formula [A-B]

   A = the sum or aggregate of sum received under the life insurance policy during the first previous year; and

   B = the aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum in the first previous year that has not been claimed as a deduction under any other provision of the Act;

2. Where the sum is received under the life insurance policy during the previous year subsequent to the first previous year (hereinafter referred to as subsequent previous year), the income chargeable to tax in the subsequent previous year shall be computed in accordance with the formula [C-D]

   C = the sum or aggregate of the sum received under the life insurance policy during the subsequent previous year; and

   D = the aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum in the subsequent previous year not being premium which –

   (a) has been claimed as a deduction under any other provision of the Act; or

   (b) is included in amount 'B' or amount 'D' of this rule in any of the previous years or years.

Example:

Particulars	Person A
Date of investment	30.04.2023
Tenure of the policy	10 years
Sum Assured	50 lacs
Premium payable every year	3.4 lacs
Premium paid over the tenure of the policy [A]	34 lacs
Whether Deduction under section 80C is available	Yes
Amount of Deduction available under section 80C each year	1.5 lacs
Total deduction claimed during the tenure of the policy [B]	15 lacs
Net amount of premium-deductible under section 56(2)(iii) [C=A-B]	19 lacs
Consideration received on maturity [D]	65 lacs
Amount taxable on maturity under section 56(2)(iii) [E = D-C]	46 lacs

Last updated: 18/09/2023

Article contributed by:

Sudhanshu Dixit

Senior Manager – Direct Tax

MBG Corporate Services