K. N. Muthiah
Lakhs of people have received their maturity proceeds under LIC Wealthplus Insurance policies during the year ended 31-3-2018 and they have to submit their income tax return on due dates in this year on different dates according to their status.

As per amendments introduced in the Finance Act, 2003, any proceeds received on account of maturity/surrender of an insurance policy were exempt from tax only if the premium paid did not exceed 20%  of the sum assured. As an example, if the annual premium is Rs 10,000, to qualify for the exemption, the minimum sum assured under the policy was required to be Rs. 50,000. This is applicable to LIC Wealthplus policy introduced in the year 2010.

There are numerous policy holders who have opted for a single premium paying almost the Sum Assured under this policy in the year 2010 and have received the maturity proceeds .This raises the question whether the entire maturity value is taxable as per section 80 D.

But,the circular no.7 of 2003 dated 5-9-2003 gives clarity that the entire maturity receipts are not taxable and that the premium originally paid shall be deducted from the maturity proceeds and the profit and bonus realized alone is taxable. Note 10.3 of the said notification given below clarifies this issue

10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.

It has to be noted that LIC Wealthplus is ULIP policy and the gain realized shall be shown as Long Term Capital Gain and not as Income from other sources

(Author can be reached at knmuthiah@yahoo.co.in)

More Under Income Tax

18 Comments

  1. Bhushan Kumar says:

    Insurer has deducted 1% tax on total assured sum including bonus (Rs 14 lacs). Should I show this gross amount as “income from other sources ” in ITR 1 and pay additional tax depending on tax slabs

  2. RRVK says:

    KN.MUTHIAH Sir,
    What stand should the tax payer should take for current returns filing w.r.t LIC Wealth Plus maturity proceedings? If I declare this a LTCG, then it looks like CPC, Bangalore will anyway send notice asking for paying remaining tax? In that case, i have again deal clarifying the points you have mentioned above. Do we have any cases where tax payer has won the arguments based on above justifications?

    Also one more question. Can we take further LTCG tax exemption under 54F if I invest in buying residential property?

    1. KN.MUTHIAH says:

      In my considered opinion,you shall not include the maturity proceeds under your income at all. Take the entire maturity proceeds to your capital account.
      CPC will reject your IT Return. You give your reply as” The TDS made by LIC on my wealthplus policy is not in accordance with law and as the TDS deducted appears in Form 26 AS,you are not accepting my return. Kindly send my file for limited scrutiny to my jurisdictional Assessing Officer with whom I shall elaborately place the legal issues involved,facts and records in this issue.”
      When your file comes up for Limited scrutiny with your jurisdictional AO, you shall raise the various points given in my article as well as further inputs which your Auditor may think as valid.

      CPC is only a processor of your return and will not go through the legality issues.

      Donot complicate by showing the maturity proceeds as LTCG and try to set off with the purchase of residential property and so on.

      If you have purchased any residential property,then this could be argued at the time of Limited Scrutiny with your Jurisdictional AO,in case if AO rejects your argument in claiming exemption from LTCG on the maturity proceeds.

  3. KN.MUTHIAH says:

    Iam getting request for further clarifications on Taxability of LIC Wealthplus Policy. Most of the policy holders are convinced that only the gain realized at the time of redemption is taxable. The main question is whether the gain realized shall be shown as Income from other sources or as LTCG. To make things clear I give below my opinion on this issue. You could take necessary consultations before filing your return

    LIC Wealthplus policy is an Unit Linked Insurance Policy. The section 10D was introduced in the Finance Act,2003 . By this amendment,when the premium payable exceeds 20% of the sum assured then the maturity proceeds are taxable. In the same Finance act ,2003 explanatory note vide circular no.7 of 2003 through point no.10.3,it was further clarified that single premium policies are equivalent to fixed deposits or bonds and hence only the gain is taxable.

    Taxability of any income includes income tax if the gain is reportable as income and Capital gains tax if the income is reportable as Capital Gain.

    The gains from ULIP type of policies have to be reported as Capital Gains only[ Either Long Term or Short Term] and not as income under other sources.

    The LTCG arising out of sale of shares and mutual funds were exempted upto 31-3-2018 and after that have been brought under the ambit of LTCG subject to Grandfathering provisions. But, ULIP was not included in the amendment. This effectively means any LTCG realized on the sale ULIP still remains fully exempted.

    You have purchased in the year 2010 and sold in 2018 and accordingly the gain realized is only LTCG.

    Thus,as per section 10D the Wealthplus policy gain alone is taxable.But,since the gain realized is in the nature of LTCG ,LIC Wealthplus having ULIP Status,the LTCG realized on redemption is entitled for exemption.

    You could discuss the above explained issues with your Tax consultant or Auditor and take appropriate decision.

    What I have given above is my considered opinion only.

    Regards,
    KN.MUTHIAH

    1. Rajesh says:

      Dear KN Muthiah Sir,

      I completely agree to your interpretation that only gains should be taxed. And in fact, the TDS change in budget 2019 from 1% on complete proceeds to 5% on gain only clarifies this point. Below links will help:
      https://www.thehindubusinessline.com/money-and-banking/insurers-say-5-tds-on-net-proceeds-of-life-cover-will-ease-tax-compliance/article28361894.ece
      https://www.moneycontrol.com/news/business/personal-finance/budget-2019-tweaks-taxes-on-insurance-maturity-proceeds-4269881.html

      Now comes the bigger issue – Gains to be shown as Other Income or LTCG. Below Taxmann article (Point 5) says LTCG:
      https://www.taxmann.com/budget-2017-18/budget/t197/impact-analysis-of-all-change-proposed-in-tds-provisions.aspx

      But I’m afraid if this is right. Taxmann team has taken Insurance policy as a capital asset which I’m not sure.
      Here is my opinion with a big disclaimer since I’m and engineer and not a CA 😊
      a. ULIP is primarily an insurance product (even though portion of premium used for buying insurance could be only 5%) and is governed by IRDA and not SEBI, that’s why IRDA and SEBI fought in 2010 and Govt had to intervene. So, ULIP should follow insurance laws. I don’t know if IRDA products qualify for LTCG
      b. If the sum assured is 10 times or 5 times for policies prior to Apr 1, 2012, then ULIP rushes to take exemption under 10(10 D) which is meant for insurance policies and that is the main reason for ULIPs popularity. Then if the premium is high and doesn’t qualify for exemption under 10(10 D), ULIP cannot present itself like a mutual fund or ELSS which are governed by SEBI. It cannot have the best of both worlds (insurance and MF), it has to act like either insurance (which it is) or mutual fund
      c. You mentioned that when 10% LTCG was introduced in 2018 on stocks and MFs, ULIP was not mentioned. So, for ULIPs, LTCG should continue to be tax free. But was ULIP mentioned in section 10(38) which granted LTCG exemption to stocks and MF, probably not. So, ULIP didn’t have LTCG concept even to begin with
      d. I think ULIP is a good product but some of us consumers got into this unplanned taxation since we were not aware that our sum-assured should have been 5 or 10 times
      e. All said and done, I also wish that ULIP gets treated like MF since it invested in market. But one thing seems logical – it has to follow either insurance rules or MF rules but not both as per its convenience. If it strictly follows MF rules, then all ULIPs (even the one exempted in 10(10D)) should pay LTCG, isn’t it?

      I came to know from 2 sources that it is better to pay tax on gains only as income from other sources. I’m also struggling with the same issue, so if there is a strong evidence to treat this as LTCG, it would help.

  4. Ayan Chakrabarti says:

    what if i show my initial invested amount under exempted income and the gain part as interest income under “income from other sources”.will that count as a valid ITR

  5. KN.MUTHIAH says:

    I would like to add two points further to my earlier article.
    The main issue is that ” LIC has deducted tax at 1% on the entire maturity proceeds of LIC Wealthplus and CPC expects every assessee to show the entire receipts as Income from other sources.”
    Let us look into the basic of any accounting system.The premium paid for the policy is the capital employed which has been accumulated over the years upon payment of applicable income tax in the earlier years. The maturity proceeds include the premium paid plus accrued bonus less Insurance premium deducted in the earlier years which is reflected in the NAV of the units under LIC Wealthplus. My simple argument is how could the capital invested by you which is returned to you along with the profit as maturity proceeds could be taxed as Income Tax.
    Capital, that too idle capital could be taxed as Wealth Tax which of course is not in force at present. No one could accept the concept that the capital invested shall again be taxed as Income Tax and such interpretations will only be quashed by any court of law.
    In all, in my considered opinion,LIC Wealth Plus policy maturity proceeds as a whole less the earlier premium paid alone could be taxed.
    In addition LIC Wealthplus has ULIP Status. The Finance Act 2018, has brought investment in equity and mutual funds into the ambit of LTCG with Grand fathering provisions , but ULIP remains untouched. Since most of the policy holders of LIC Wealth Plus have been holding it for nearly eight years, the LTCG realized from it is LTCG and non-taxable only.
    The policy holders shall take necessary consutations with their Auditors and decide the method of filing. Even when you exclude the entire maturity proceeds of LIC Wealth Plus in your return of income or show only the gain portion as income from other sources, CPC Bangalore who process your returns may not accept your return. You could raise objections and at best CPC will transfer it to your jurisdictional Assessing officer with whom you could explain in depth about this issue.
    In the meanwhile some positive rulings or developments favourable to policy holders could emerge. But,all policy holders could take proper legal advise from their Income Tax consultants and Auditors and decide the course of filing.

  6. KN.MUTHIAH says:

    At present, under section 194DA of the Income Tax Act, a person is obliged to deduct tax at source if the person pays any sum to a resident under a life insurance policy, which is not exempt under sub-section (10D) of section 10.

    When LIC Wealthplus policy was floated most of the policy holders opted for single premium policy which of course does not fulfill the exemptions given under section 10D and hence TDS under section needs to be deducted as per section 194DA.

    Thus, it will look superficially that deduction of tax at 1% by LIC is in order. But, 1% TDS deducted by LIC is incorrect since circular no.7/2003 dated 5-9-2003 of the income tax Act clearly stipulates under point no.10.3 that only the income accruing from the policy other than the premium paid by the assessee. In fact this note no.10.3 clearly says:-”Insurance policies with high premium and minimum risk covers are considered as similar to Deposits and Bonds”. I give below the text of note no.10.3 of circular no.7/2003.

    Circular No. 7/2003-Income Tax Dated 5-9-2003

    ·

    10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.

    Thus, it is evident and clear that” only the excess receipts over and above the premium paid alone is taxable”. But, LIC is going on deducting 1% tax on the entire maturity value and the same is reflected in the gross receipts in Form 26 AS which results in CPC who process our returns to blindly include the entire receipts under the head Income from other sources, which means you have to pay tax even on the initial premium paid by you, which is wrong , painful and not in accordance with Law.

    This has been understood of late and memorandum to Finance Bill 2019 says “Several concerns have been expressed that deducting tax on gross amount creates difficulties to an assessee who otherwise has to pay tax on net income (that is after deducting the amount of insurance premium paid by him from the total sum received),” said the Memorandum to the Finance Bill, 2019, adding that it will also help tax administration easily match the TDS.

    It is equally important to note that section 10D amendments brought in the year 2003 speaks only about Insurance policies and not about Unit Linked Insurance Policies [ULIP]. It is pertinent to note that LIC themselves declared at the time of opening subscription to LIC Wealthplus that it has ULIP status. You are also aware that they have been deducting Insurance premium in the policy accrual regularly as revealed in their own statement. Thus, LIC Wealthplus being having ULIP status, even the entire gross receipts at the time of maturity which includes the premium paid, bonus etc is clearly exempt from taxation. Only LIC has to answer for the need to deduct tax on the maturity proceeds of LIC Wealthplus.
    You could contact me for any further clarification on this subject.
    Regards,
    KN.MUTHIAH

    1. sk gupta says:

      Whether indexation benefit is available on long term capital gain (approx Rs.25000) received on maturity of LIC wealth plus policy during Jul-18. This policy was issued in Mar’2010 and premium of Rs.1 lac was paid

    2. sk gupta says:

      You have mentioned in your article that LIC Wealth Plus is having a ULIP status as declared by LIC at the time of issue of this policy during the year 2010 and it has been declaring premium and bonus every year. As such, the excess of maturity proceeds over the original amount of premium paid, should be exempt.
      Pl inform whether this is your interpretation or whether there is any official clarification from Government side

  7. UTTARAYAN H.E. says:

    Same is my case in this A.Y. 2019-20. Kindly help us how to handle the issue during TAx filing so that CPC accepts it?
    – Santosh Kr. Mondal

  8. Anil Trivedi says:

    Dear Sir,
    I am also victim of this LIC wealth plus table 801 policy. I have invested 1,60,000 as single premium and got 2,08.760 after 8 years. LIC deducted 2088 as income tax under 194DA and issued TDS certificate which shows 2,08,760 as interim bonus.
    I am salaried person and filed ITR-1 in which I showed 2,08,760 as other income. Now CPC asking me to deposit 43,000 as tax where as total gain in 8 year is only 48,760/-. My income falls in 30% bracket.
    Please suggest how to revise my ITR. Can I file revised ITR-1 and show 48.760 (gain) as other income.

    PLEASE HELP ME..
    Regds,
    Anil Trivedi
    9717891620

    1. Lavina Lewis says:

      Dear Sir,
      Kindly provide guidance for above query raised by Mr. Anil. Coz even I have the same issue. Infact while filing ITR I had shown the income from LIC under LTCG and calculated tax . Now CPC has asked me to pay 53,000/- including 11,489 LTCG already paid by me. Kindly advise.

    2. Tanya says:

      Hi Sir,

      Did you manage to get an answer to this? Facing a similar issue. Trying to understand if I will get picked up by ITO for showing the Gross proceeds – Indexed Cost of Acquisition as LTCG.

  9. KN.MUTHIAH says:

    LIC Wealthplus is an Unit Linked Insurance Policy. The gains realized have to be necessarily treated as LTCG since the policy would have been held for more than one year.
    Any unit linked investment has to be equated to that of a MUTUAL FUND investment only.
    When there is Long Term Capital Gain on realization from investments in Mutual Fund ,the same is exempted similar to investments in shares.
    Likewise,Gain realized on maturity of LIC Wealthplus, has to be naturally exempted from levy of LTCG Tax as the maturity is realized after one year from the date of investment only(In fact it is after eight years from investment).
    As per interpretation of Incometax laws on capital gains,the entire proceeds realized on investment from LIC Wealthplus upon maturity has to be fully exempted whether it is under a single premium policy or multiple premium policy,since it is an Unit Linked Insurance Plan .
    But, unfortunately LIC of India have deducted tax at source at 1% on the maturity proceeds of LIC Wealthplus Policies,which is the basis for such confusions with CPC, Bangalore who process our IT Returns. As there is a TDS Deduction made by LIC of India, CPC ,BANGALORE EXPECTS YOU TO SHOW IT AS INCOME FROM OTHER SOURCES IN YOUR RETURN.
    The mistake committed by LIC by deducting tax at source on Wealthplus policies, has put so many Tax Payers under unnecessary trouble.
    Moreover,the return from LIC Wealthplus policy was highly pathetic. LIC instead of doing only life insurance business has unnecessarily entered into this ULIP policy which involves investment is stock market and gave a very, very meager and highly pathetic returns to all LIC Wealthplus investors unlike all other mutual funds which gave very attractive returns to its investors during this period.
    LIC with its huge army of agents have in fact mislead crores of investors with a very great hype while commencing this Wealthplus policy in the year 2010.
    In addition without being aware of the law,they have also deducted 1%TDS as rubbing salt into wound on their LIC Wealthplus policy holders

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