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
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