New Income Tax Rules on Taxation of Life Insurance Policy Receipts

New CBDT Guidelines: Calculating Income from Life Insurance Policies with Premiums Exceeding Rs. 5 Lakh

The Ministry of Finance has issued Notification No. 61/2023, dated 16th August 2023, pertaining to a new amendment in the Income Tax Rules of 1962. This Sixteenth Amendment focuses on the computation of income chargeable to tax related to the sums received under life insurance policies. These guidelines outline the method for calculating income from life insurance policies when the total annual premium exceeds Rs. 5 lakh.

Analysis:

The CBDT has introduced Rule 11UACA under the Income Tax Amendment (Sixteenth Amendment) Rules, 2023, to govern the calculation of income related to the maturity proceeds of life insurance policies issued after 1 April 2023, where the premiums paid are above Rs. 5 lakh. The rules Rule 11UACA differentiate the computation based on whether the sum is received for the first time or during subsequent years under the life insurance policy.

The amendment, as described in the notification, details the methodology to compute the income chargeable to tax under clause (xiii) of sub-section (2) of section 56 of the Income-tax Act, 1961.

According to the new rules, life insurance policies issued after 1 April 2023 will be eligible for tax exemption on maturity benefits under Section 10(10D) of the Income Tax Act, as long as the total premium paid annually does not exceed Rs. 5 lakh.

However, for policies with premiums exceeding Rs. 5 lakhs, the maturity proceeds will be added to the individual’s income and subjected to applicable income tax rates. This modification in the tax treatment of life insurance policies, excluding Unit Linked Insurance Policies (ULIPs), was introduced in the Union Budget for the fiscal year 2023-24.

As per the CBDT notification, Section 10(10D) of the Income Tax Act currently provides an exemption from income tax for the amount received from a life insurance policy, including bonus allocations, subject to specific conditions.

Starting from the assessment year 2024-25, amounts received from life insurance policies issued after 1 April 2023 (excluding ULIPs) will not be exempt under Section 10(10D) of the Income Tax Act if the total premium paid in any previous year during the policy term exceeds Rs. 5,00,000.

Conclusion: The Sixteenth Amendment to the Income Tax Rules, 1962, brings clarity to the computation of income chargeable to tax related to life insurance policies. It provides specific formulas to calculate the taxable income and clearly outlines the exclusions.  The CBDT’s comprehensive guidelines outline the computation of eligible exemption for maturity proceeds from life insurance policies and include illustrative examples. However, it’s important to note that the taxation provision for amounts received upon the insured’s death remains unchanged and continues to be exempt from income tax.

MINISTRY OF FINANCE
(Department Of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)

Notification No. 61/2023-Income Tax | Dated: 16th August, 2023

G.S.R. 604(E).—In exercise of the powers conferred by clause (xiii) of sub-section (2) of section 56, read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct taxes hereby makes the following rules further to amend the Income-tax Rules,1962, namely:─

1. Short title and commencement: – (1) These rules may be called the Income tax Amendment (Sixteenth Amendment), Rules, 2023.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Income-tax Rules, 1962, after rule 11UAC, the following rules shall be inserted, namely:—

“11UACA Computation of income chargeable to tax under clause (xiii) of sub-section (2) of section 56. – For the purpose of clause (xiii) of sub-section (2) of section 56, where any person receives at any time during any previous year any sum under a life insurance policy, then, the income chargeable to tax under the said clause during the previous year in which such sum is received shall be computed in the following manner, namely: —

(i) where the sum is received for the first time under the life insurance policy during the previous year (hereinafter referred to as first previous year), the income chargeable to tax in the first previous year shall be computed in accordance with the formula,—

A-B
where, –

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 deduction under any other provision of the Act;

(ii) 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 to the formula,—

C-D

where, –

C = the sum or aggregate of 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 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 year or years

Explanation .– For the removal of doubts, it is clarified that the sum received under a life insurance policy would mean any amount, by whatever name called, received under such policy which is not to be excluded from the total income of the previous year in accordance with the provisions of clause (10D) of section 10, other than the sum–

(a) received under a unit linked insurance policy; or

(b) being the income referred to in clause (iv) of sub-section (2) of section 56.”.

[Notification No. 61/2023/ F.No.370142/28/2023-TPL]
SOURABH JAIN, Under Secy.

Note : The principal rules were published in the Gazette of India, Extraordinary, Part-II, Section 3, Sub-section (ii) vide notification number S.O. 969(E), dated the 26th March, 1962 and was last amended vide notification number G.S.R. 595 (E) dated 9th August, 2023.