How exemptions for insurance coverage insurance policies work

The Finance Act, 2023, amended part 10(10D) of the Income Tax (I-T) Act to take away the exemption out there to sum obtained from a life insurance coverage coverage in case the mixture premium for all insurance policies issued on or after the 1 April exceeds ₹5 lakh. On 16 August, the Central Board of Direct Taxes issued a round clarifying this. If premium is payable for a couple of life insurance coverage coverage, issued on or after 1 April, the exemption below the mentioned clause shall be out there solely with respect to such insurance policies the place the mixture premium doesn’t exceed ₹5 lakh for any of the earlier years throughout the time period of any of these insurance policies.

For occasion, Jayesh holds insurance coverage coverage A issued on 1 April and pays premium of ₹5 lakh for 10 years till 1 April 2032. Then he purchases insurance coverage coverage B on 1 April 2033 and pays premium of ₹5 lakh for an additional 10 years till 1 April 2042. On 1 April 2043, he receives ₹50 lakh from life insurance coverage coverage A on maturity and on 1 April 2046 he will get ₹60 lakh from insurance coverage coverage B on maturity. In this case, the consideration obtained from each the insurance policies A and B shall be exempt as the mixture of the annual premium payable for the life insurance coverage insurance policies A and B collectively didn’t exceed ₹5 lakh for any of the earlier years throughout the time period of the insurance policies.

The above amendments are for all times insurance coverage insurance policies apart from a unit-linked insurance coverage coverage (ULIP). Let’s take the instance of Rekha who holds the next life insurance coverage insurance policies and ULIPs (see graphic). The give up worth of ULIP X might be exempt below part 10 (10D) because the annual premium doesn’t exceed ₹2.5 lakh throughout the time period of the coverage. Further, the consideration obtained below the life insurance coverage coverage A throughout the earlier yr 2033-34 shall even be exempt. However, because the sum of premium of life insurance coverage insurance policies A, B and C exceeds ₹5 lakh throughout the time period of those insurance policies, Rekha ought to analyse whether or not she ought to declare the exemption or not. If she claims the exemption for coverage A then for the earlier yr 2034-35, the consideration for all times insurance coverage coverage C alone shall be exempt below part 10(10D) because the sum of premium of life insurance coverage insurance policies A and C doesn’t exceed ₹5 lakh in any of the earlier years throughout the time period of those insurance policies. Life insurance coverage coverage C is most popular over life insurance coverage coverage B being extra useful. However, if the consideration from life insurance coverage coverage A just isn’t claimed as exempt in earlier yr 2033-34, then the consideration from each the life insurance coverage insurance policies B and C shall be exempt.

The above provisions for taxability of consideration from insurance coverage coverage with premium exceeding ₹5 lakh shall not apply in case of any sum obtained on the loss of life of an individual. Under time period life insurance coverage, coverage quantity is paid to the nominee in case of the loss of life of the individual insured throughout the time period of the coverage and no quantity is paid to anybody if the insured individual survives the coverage tenure. Hence, any sum obtained below a time period insurance coverage coverage shall at all times stay exempt regardless of the premium paid. Further, the premium paid for such insurance policies shall not be counted for checking ₹5 lakh restrict. It can also be clarified that the premium payable or mixture premium payable for all times insurance coverage insurance policies shall be unique of the quantity of the products and repair tax (GST) payable on such premium.

(The examples of Jayesh and Rekha are hypothetical.)

Nitesh Buddhadev is the founding father of Nimit Consultancy.

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Updated: 20 Aug 2023, 10:44 PM IST