CBDT introduces tax rules for high-premium life insurance policies

The Income Tax department has unveiled a framework to determine the income proceeds from life insurance policies in cases where the total annual premium surpasses Rs 5 lakh.

The Central Board of Direct Taxes (CBDT) has issued the Income Tax Amendment (Sixteenth Amendment) Rules, 2023, which outline rule 11UACA for computing income in relation to the sum received upon maturity of life insurance policies. This applies specifically to policies where the premium amounts exceed Rs 5 lakh, and these policies are issued on or after April 1, 2023.

 For premiums surpassing 5 lakh, the returns will be included in your income | Image credit: Pexels

Under the new directive, starting April 1, 2023, the tax exemption on maturity benefits, as stipulated in Section 10(10D), will be applicable only if an individual's aggregate premium payments remain within Rs 5 lakh per annum.

For premiums surpassing this threshold, the returns will be included in the individual's income and subjected to the prevailing tax rates.

This change in tax regulation concerning life insurance policies, except Unit Linked Insurance Plans (ULIP), was initially proposed in the Union Budget 2023-24.

Income from other sources

Om Rajpurohit, Joint Partner (Corporate & International Tax) at AMRG & Associates, commented that, as per this formula, any surplus amount received upon maturity would be liable to taxation under the category of "income from other sources".

Amit Maheshwari, Tax Partner at AKM Global, stated that this provision was introduced to eliminate the tax advantage provided to investments disguised as insurance policies. 

Image credit: Unsplash

Recognising the potential impact on numerous individuals, particularly those with higher income levels, the CBDT has issued comprehensive guidelines to alleviate complications, a move that has been well-received.

Maheshwari further noted that the guidelines are detailed and include various examples to elucidate the computation of the eligible consideration for exemption.

It's essential to emphasise that the tax provision concerning the amount received upon the insured's demise remains unaltered and continues to be exempt from income tax.

(With PTI inputs)