Finance Bill 2024 proposes an amendment to Rule 2 of the First Schedule under section 44 of the Income-tax Act, targeting misuse of deductions by life insurance companies. Currently, the profits of life insurance businesses are calculated based on the annual average surplus from actuarial valuations. However, instances have been noted where life insurance companies have claimed deductions for non-business expenses, which are not admissible under section 37. To address this, the proposed amendment requires that any such non-admissible expenditures be added back to the profits of the life insurance business. This change aims to ensure that deductions are accurately applied and prevent the misuse of tax provisions. The amendment will be effective from April 1, 2025, impacting the assessment year 2025-2026 and subsequent years.
Budget 2024: Preventing misuse of deductions of expenses claimed by life insurance business
Section 44 of the Act provides for computing of profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, to be in accordance with First Schedule of the Act, notwithstanding other specific provisions of the Act.
2. Rule 2 of the First Schedule, applicable for Life insurance business, states that the profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter-valuation period ending before the commencement of the assessment year and excluding from it such surplus or deficit included therein which was made in any earlier inter-valuation period.
3. It has been noticed that there have been instances where non-business expenses have been claimed by life insurance companies and there is no provision to add back these to the income of such companies. In order to ensure that provisions are not misused to claim deduction for expenses which are otherwise not admissible under the provisions of section 37 of the Act, it is proposed to amend Rule 2 of the First Schedule of the Act to provide that any expenditure which is not admissible under the provisions of section 37 in computing the profits and gains of a business shall be included to (i.e. added back to) the profits and gains of the life insurance business.
4. The amendment will take effect from the 1st day of April, 2025 and will accordingly apply from assessment year 2025-2026 onwards.
Extract of Clause 87 of Finance Bill 2024
Clause 87 of the Bill seeks to amend the First Schedule to the Income-tax Act relating to insurance business.
Rule 2 of the said Schedule, states that the profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938, in respect of the last inter-valuation period ending before the commencement of the assessment year and excluding from it such surplus or deficit included therein which was made in any earlier inter-valuation period.
It is proposed to insert a proviso to the said rule, so as to provide that any expenditure which is not admissible under the provisions of section 37 in computing the profits and gains of a business, shall be included back to the profits and gains of the life insurance business.
This amendment will take effect from 1st April, 2025 and will, accordingly, apply in relation to the assessment year 2025-2026 and subsequent years.
Proposed Amendment to First Schedule of Income-tax Act, 1961
In the First Schedule to the Income-tax Act, in rule 2, the following proviso shall be inserted with effect from the 1st day of April, 2025, namely:––
“Provided that any expenditure which is not admissible under section 37 in computing the profits and gains of a business, shall be included to the profits and gains of life insurance business.”.
