CBDT issues fresh guidelines for tax exemptions on life insurance policy

The Central Board of Direct Taxes (CBDT) notified new guidelines under clause (10D) of section 10 of the Income-Tax Act, 1961, in a circular dated August 16.

Clause (100) of section 10 of the IT Act exempts from income tax any amount received under a life insurance policy, including the amount allocated as a bonus on such a policy, with certain exclusions.

This provision has been amended pursuant to The Finance Act, 2023, inter alia, by replacing the extant sixth proviso with the new sixth, seventh, and eighth provisos to, inter alia, stipulate that:

(i) From the assessment year 2024-25, the sum received under a life insurance policy, other than a unit-linked insurance policy, issued on or after the first day of April 2023, shall not be exempt under the said clause if the premium payable for any of the previous years exceeds Rs 5,00,000 [sixth proviso];

(ii) if a premium is payable for more than one life insurance policy, other than a unit-linked insurance policy, issued on or after April 1, 2023, the exemption under the said clause shall be available only with respect to such policies if the aggregate premium for any of the previous years during the term of any of those policies does not exceed Rs 5,00,000 [seventh proviso];

(iii)The sixth and seventh stipulations do not apply to money acquired as a result of someone's death [eighth stipulation].

Further, a new clause (xiii) provisions for taxation of amounts received under life insurance policies that are not otherwise exempt from taxation under the IT Act have been added to subsection (2) of section 56 by the board.

In the circular, it was explained that "...if any sum is received, including the amount allocated by way of bonus, at any time during a previous year, under a life insurance policy (other than the sum)—maybe received under a unit linked insurance policy or being the income referred to in clause (iv) of sub-section 2—which is not to be excluded from the total income of the previous year in accordance with the provisions of clause (10D) of section 10, the sum so received as exceeds the sum so

The CBDT has also added clause (xviid) to section 2's clause (24) to specify that any amount mentioned in clause (xiii) of section 56's subsection (2) counts as income.

The amount received under any unit-linked insurance policy (except any such sum received on the death of a person) issued on or after the 01.02.2021 shall not be exempt under said clause if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 2,50,000 (fourth proviso) or Rs 2,750,000 (seventh proviso) (Finance Act, 2021). Exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 2,50,000 for any previous years during the term of any of the policies (fifth proviso), and only if the premium is payable for more than one UUPs issued on or after 01.02.2021.

As part of the circular, the tax authority offered guidance for complying with the provisions of the aforementioned clause. Here are some of them:

(i) Any life insurance policy (other than a unit-linked insurance policy) issued on or after 0 1.04.2023 is a "eligible life insurance policy";

(ii) In the context of a qualified life insurance policy, "consideration" refers to any payment made under the policy, including bonuses.

(iii) When referring to a "current prior year," it indicates the prior year in which the receipt of consideration is being reviewed for any tax implications.

If the consideration received in the previous year under an eligible life insurance policy is exempt under clause (100) of section 10 of the Act, further conditions must be met.

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