The Income Tax Department has introduced new rules for calculating income proceeds from life insurance policies with an annual premium exceeding ₹5 lakh. These regulations come as part of the Income Tax Amendment (Sixteenth Amendment) Rules, 2023, introduced by the Central Board of Direct Taxes (CBDT), which includes the newly introduced rule 11UACA.
The primary purpose of these rules is to counteract tax advantages associated with investments that are disguised as insurance policies.
What is the new rule?
The recently enacted rule, known as 11UACA, specifically addresses the calculation of income that arises upon the maturity of life insurance policies issued on or after April 1, 2023, with premiums surpassing ₹5 lakh.
According to this provision, policies issued after the mentioned date will qualify for tax exemption on maturity benefits under Section 10(10D) only if the total aggregate premium paid by an individual does not exceed ₹5 lakh annually.
For policies with premiums beyond this limit, the maturity proceeds will be considered as part of the individual's income and will be subjected to taxation based on applicable rates.
This modification in tax regulations does not encompass Unit-Linked Insurance Policies (ULIPs) and was implemented through the Union Budget for the fiscal year 2023-24.
Why this new rule has been enacted?
The key objective of this provision is to eliminate tax benefits exploited through investments that are disguised as insurance policies. The rule aims to provide a fair and transparent method for calculating income from high-premium life insurance policies and curb the potential misuse of tax advantages that may arise from such policies.
It's important to note that the tax provisions for amounts received upon the death of an insured individual remain unchanged and continue to be exempt from income tax.
The circular issued by CBDT specifies that if any sum, including bonus amounts, is received during a previous year under a life insurance policy (excluding ULIPs), and this sum is not excluded from the total income as per the provisions of clause (10D) of section 10, the surplus amount beyond the aggregate premiums paid during the policy term will be subject to income tax under the "Income from other sources" category.
Additionally, the CBDT introduced a new sub-clause (xviid) in clause (24) of section 2, indicating that income shall encompass sums mentioned in clause (xiii) of sub-section (2) of section 56.
In conclusion, the new tax rules regarding high-premium life insurance policies aim to ensure that genuine insurance benefits are provided, while also preventing the potential misuse of tax advantages through disguised investments. The guidelines issued by CBDT intend to alleviate any challenges that may arise from the implementation of these provisions.