Issue/Justification

Any sum received under a Keyman insurance policy is not exempt under section 10(10D). The meaning of “Keyman Insurance Policy” given in Explanation 1 to section 10(10D) was amended by Finance Act, 2013 to include such policy which has been assigned to a person at any time during the term of the policy, with or without consideration”. This amendment is effective w.e.f. 1.4.2014 (i.e. A.Y.2014-15).

The effect of this amendment is to deny the benefit of exemption in respect of maturity proceeds of keyman insurance policy which has been assigned to a person during the term of the policy, whether with or without consideration, by including the assigned policy within the definition of “Keyman insurance policy”.

The issues under consideration and suggestions thereof in this regard are as follows –

The entire proceeds would be subject to tax under section 17(3)(ii) in the hands of the person to whom the policy is assigned, whereas only the premium paid by the employer on which deduction has been claimed less the surrender value paid by the employee to the employer at the time of assignment should be subject to tax, since the same represents the actual benefit availed by the assignee.

Suggestion

It is suggested that section 17(3)(ii) may be appropriately amended to provide that tax would be levied only to the extent of such difference, or in the alternative, deduction for surrender value may be provided for under section 16. In such a case, the employer can deduct tax at source on the differential amount treated as “profit in lieu of salary” at the time of assignment.

Further, in any case, the maturity proceeds received on death of the assignee should be kept out of the tax net. This benefit is similar to the exemption given in respect of life insurance policies, where the annual premium paid exceeds 10% of minimum sum assured.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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