The Central Board of Direct Taxes (CBDT) vide notification no 61/2023/F. No. 370142/28/2023-TPL dated August 16, 2021, has notified Rule 11UACA of Income-tax Rules 1962 (the Rules) for computation of Income chargeable under Income from Other Sources per section 56(2)(xiii) of the Income-tax Act 1961 (the Act). 

Background

  • Finance Act 2023 inserted section 56(2)(xiii) of the Act relating to taxation of income from insurance policies (other than ULIP for which provisions already exists) having premium or aggregate of premium above Rs 5,00,000 in a year.
  • This income shall be taxable under the head “Income from Other Sources”. Deduction shall be allowed for premium paid, if such premium has not been claimed as deduction earlier.
    Income will be exempt if received on the death of the insured person as per sixth proviso to section 10(10D) of the Act.
  • These provisions are applicable for policies issued on or after 1st April, 2023.

Taxability of Income from Life Insurance Policies

The taxability of income from Life Insurance policies (other than ULIP) for policies issued on or after 01/04/2023 per section 10(10D) and section 56(2)(xiii) of the Act is as under.

Sr No. Details of Policy* Taxability under section 56(2)(xiii)
1 Where premium or aggregate of Premium is less than Rs.5,00,000/- in any year Exempt
2 If Premium payable or aggregate of Premium is less than Rs.5,00,000/- for any of the years during the term of policy exceeds 10% or 15% (in case of severe disability or suffering from specified diseases) of the actual capital sum assured. Exempt
3. Where premium or aggregate of premium payable for any previous years during term of policy exceeds Rs. 500,000 or more Taxable
4. Amount received on death Exempt

*We have assumed all policies have been issued after 1.4.2012.

Notification and Rule 11UACA

Rule 11UACA provides method for computing income chargeable to tax under the head ‘ Income from other sources’ in respect of taxable non-ULIP policy. Based on the new Rule 11UACA, below is the income computation methodology for taxable non ULIPs :

1. Where sum is received for the first time under the life insurance policy during the previous year per Rule 11UACA:

First year
Rule Particulars Amount (In Rs.)
(A) Aggregate of sum received under the life insurance policy during the first previous year XX
Less (B) Aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum* XX

 
Amount chargeable to tax under section 56(2)(iii) of the Act as Income from Other Sources XX
*sum has not been claimed as deduction under any other provision of the Act.

2. Where sum is received under the life insurance policy during the subsequent previous years per Rule 11UACA:

Second year & onwards
Rule Particulars Amount (In Rs.)
(C) Sum or aggregate of sum received under the life insurance policy in subsequent year XX
Less (D) The aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum** XX

 
Amount chargeable to tax under section 56(2)(iii) of the Act XX
** Not being premium (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.

3. Vide circular no 15 of 2023 dated 16 August 2023, has clarified that, the sum received under a life insurance policy apart from what has been mentioned in section10(10D), would exclude the following:

  • Received under a unit linked insurance policy; or
  • being the income referred to in section 56(2)(iv) of the Act.
  • GST not to be included while calculating the threshold
  • Term life insurance policy

Illustration

Below example related to whether exemption under section 10(10D) of the Act will be available or not as per sixth proviso to section 10(10D) of the Act and taxability under section 56(2)(iv) of the Act:

Example 1

Life Insurance Policy A B
Date of Issue 01.04.2022 01.04.2023
Annual Premium (Rs.) 6,00,000 400,000
Sum Assured (Rs) 60,00,000 40,00,000
Amount received on maturity 72,00,000 48,00,000
Taxability NA Exempt
Taxable amount as per Rule 11UACA (Rs.)   Nil

Reasons:

  • The consideration received under policy A will be exempt as the policy has been issued before April 1, 2023.
  • Policy B will be exempt since aggregate annual premium does not exceed Rs. 500,000.

Example 2

Life Insurance Policy A
Date of Issue 01.04.2023
Annual Premium (Rs.) 600,000
Sum Assured (Rs) 60,00,000
Amount received on maturity 72,00,000
Taxability Taxable
Taxable amount as per Rule 11UACA (Rs.) 66,00,000 taxable under section 56(2) (xiii) of the Act.

Reasons:

  • The consideration received under policy A will be taxable since aggregate annual premium exceeds Rs. 500,000

Example 3

Life Insurance Policy A B
Date of Issue 01.04.2023 01.04.2023
Annual Premium (Rs.) 2,00,000 300,000
Sum Assured (Rs) 20,00,000 30,00,000
Amount received on maturity 24,00,000 38,00,000
Taxability Exempt Exempt
Taxable amount as per Rule 11UACA (Rs.) Nil Nil

Reasons:

  • The consideration received under policies A & B will be exempt since aggregate annual premium does not exceeds Rs. 500,000.

Example 4

Life Insurance Policy A B
Date of Issue 01.04.2023 01.04.2023
Annual Premium (Rs.) 2,00,000 600,000
Sum Assured (Rs) 20,00,000 60,00,000
Amount received on maturity 24,00,000 72,00,000
Taxability Exempt Taxable
Taxable amount as per Rule 11UACA (Rs.)   66,00,000 taxable under section 56(2) (xiii) of the Act.

Reasons:

  • The consideration received under policy A will be exempt since aggregate annual premium does not exceeds Rs. 500,000.
  • The policy B will be taxable since aggregate annual premium exceeds Rs. 500,000.

Example 5

Life Insurance Policy A B
Date of Issue 01.04.2023 01.04.2023
Annual Premium (Rs.) 2,00,000 500,000
Sum Assured (Rs) 20,00,000 50,00,000
Amount received on maturity 24,00,000 60,00,000
Taxability Taxable Exempt
Taxable amount as per Rule 11UACA (Rs.) 22,00,000 taxable under section 56(2) (xiii) of the Act.

Reasons:

  • The consideration received under policy B will be exempt since aggregate annual premium does not exceeds Rs. 500,000.
  • The policy A will be taxable since aggregate annual premium for policy A and B will exceeds Rs. 500,000.

Example 6

Life Insurance Policy A B C D E
Date of Issue 01.04.2022 01.04.2023 01.04.2024 0104.2024 01.04.2024
Annual Premium (Rs.) 6,00,000 400,000 200,000 100,000 250,000
Sum Assured (Rs) 60,00,000 40,00,000 20,00,000 10,00,000 25,00,000
Amount received on maturity 72,00,000 48,00,000 24,00,000 12,00,000 30,00,000
Taxability Exempt Exempt Taxable Exempt Taxable
Taxable amount as per Rule 11UACA (Rs.)     22,00,000 taxable under section 56(2) (xiii) of the Act   27,50,000 taxable under section 56(2) (xiii) of the Act

Reasons:

  • The consideration received under policy A will be exempt as the policy has been issued before April 1, 2023. 
  • The consideration received under policy B and D will be exempt since aggregate annual premium does not exceeds Rs. 500,000.
  • The consideration received under policy C and E will be taxable since aggregate annual premium for policies B,C, D & E will exceeds Rs. 500,000.

Example 7

1A. (Partial surrender of policy)

Life Insurance Policy A
Date of Issue 01.04.2023
Annual Premium (Rs.) 6,00,000
Sum Assured (Rs) 60,00,000
Taxability Taxable
Partial surrender 1.4.2027
Amount received on partial surrender in year 2027 36,00,000
Less: Premium paid till partial surrender in year 2027 and not claimed as deduction (Rs. 600,000 X 4) (Rs.) 24,00,000
Taxable amount as per Rule 11UACA (Rs.) 12,00,000 taxable under section 56(2) (xiii) of the Act.

Reasons:

  • The consideration received under policy A will be taxable since aggregate annual premium for policy exceeds Rs. 500,000. Further in the year of partial surrender, amount received will be taxable as Income from other sources as per Rule 11UACA of the Rules.

1B. Final surrender of policy/ maturity of policy

Life Insurance Policy   A
Date of Issue 01.04.2023
Annual Premium (Rs.) 6,00,000
Sum Assured (Rs) 60,00,000
Taxability Taxable
Final surrender 01.04.2034
Amount received on maturity in year 2038 68,00,000
Less: Aggregate premium paid till maturity year 2034 (Rs.) 60,00,000
Less: Premium paid till 1st partial surrender (Rs.) 24,00,000 36,00,000
Taxable amount as per Rule 11UACA (Rs.) in the year 2038   32,00,000 taxable under section 56(2) (xiii) of the Act.

Reasons:

  • The consideration received under policy A will be taxable since aggregate annual premium for policy exceeds Rs. 500,000. Further in the year of final surrender of policy, amount received will be taxable as Income from other sources as per Rule 11UACA of the Rules after excluding premium considered earlier.

Observation/Comment

Related Read: Buyback Tax Reforms: Impact on Companies and Shareholders

The above Rule 11UACA notified for tax calculation on life insurance policy amounts under section 56(2)(xiii) of the Act will be applicable for any sum received on the maturity of a life insurance policy, other than a unit-linked insurance plan (ULIP), if the aggregate premium paid for any year exceeds Rs. 5 lakh, as ‘Income from Other Sources’.

The notification comes to effect from 16 August 2023 and is applicable for assessment year 2024-25.

Conclusion

The new provisions tax the receipt on maturity of endowment/money back plans of Insurance policies. However, this provisions should be beneficial to tax payers, as earlier they were only able to claim deduction of premium cost to the extent of Rs. 150,000 per section 80C of the Act, but now the tax payer in the year of receipt from life insurance policy should be able to claim the entire amount of premium paid over an above claimed under section 80C of the Act.

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