CBDT clarifies regarding applicability of exemption u/s 10(10D) in respect of receipts from Life Insurance Policies in different situations, vide Circular 15/2023 dated August 16, 2023, in line with amendments in Finance Act, 2023.
In this Circular, the CBDT has provided guidelines for various situations when calculating these policy exemptions.
Amendments by Finance Act, 2023
There were several changes made by the Finance Act, 2023, which modified the conditions for income-tax exemptions and liabilities for life insurance policies.
1. Amendments in Section 10(10D)
Amendments in Section 10(10D) states that sums received from a life insurance policy, excluding Unit Linked Life Insurance Policies (ULIPs), won’t be tax-exempt if any premium or cumulative premium in preceding years throughout the policy’s term surpasses Rs. 5,00,000.
i) Sixth Proviso – Limit on Single Policy Premium: From the financial year 2024-25, if the premium payable for any previous years during a policy term surpasses Rs 500,000, the money received will not be exempted.
ii) Seventh Proviso – Aggregate Premium for Multiple Policies: If premiums are due on more than one life insurance policy, the exemption is applicable solely for such policies for which the aggregate premium doesn’t exceed Rs 500,000 for any of the previous years during the term.
iii) Eighth Proviso – Death Benefits Remain Exempt: The above provisions concerning premium limitations are negated if the sum is received due to the death of the policyholder.
2. Amendment in Section 56 Clarification
Inclusion of a new clause (xiii) in section 56(2) established that amounts received from life insurance policies not fulfilling criteria under clause (10D) of section 10 will be considered as “Income from other sources” and therefore taxable.
Past Amendments to Exemption on ULIPs vide FA 2021
The Finance Act, 2021 previously made amendments that governed unit linked insurance policies (ULIPs) issued on or after 01.02.2021. If the premium exceeded Rs 250,000 for any previous years during the policy’s term, any sum received would not be exempted under the clause.
Exceptions
Further, CBDT has clarified that premium or aggregate premium for life insurance policy distinctly excludes the Goods and Service Tax payable on such premium. These regulations will not apply to term life insurances, where the potential sum is due to the nominee only upon the insured’s death during policy term, while no payment is due if the insured survives the policy term.
Deciphering Various Scenarios for Tax Exemptions
The guidelines issued by the CBDT also elaborated on various situations and scenarios to assist policyholders in determining the tax exemptions applicable on their earnings from life insurance policies, based primarily on the total premium amount and policy type. CBDT clarifications on amendments provides guidelines to address situations arising when seeking exemptions for life insurance policies post 01-04-2023 (‘eligible life insurance policies’). Please refer the examples given in Circular to clarify the exemption available in different situations:
CBDT Income Tax Circular 15/2023 dated 16/08/2023: Clarifications/ Guidelines on Exemption u/s 10(10D) – Receipts from Life Insurance Policies
Conclusion: Adapting to Revised Tax Exemptions
These fresh guidelines issued by the CBDT bring more clarity to tax exemptions related to income from life insurance policies. As exemptions will be largely determined by the payable premiums and are guided by the conditions of the policy, policyholders must acquaint themselves with these changes to effectively manage their finances in the upcoming assessment years.
In nutshell, sums received from life insurance policies issued after 01-04-2023 will be exempt under section 10(10D) only if the premium for any year doesn’t exceed Rs 500,000, and remains lesser than 10% of the assured sum. Additionally, the cumulative premium of all life insurance policies taken by a person after 01-04-2023 shouldn’t surpass Rs 500,000 throughout any policy’s term. If it does, exemptions shall apply only to those policies whose aggregate doesn’t breach the Rs 500,000 limit.
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