Life insurance: CBDT issues guidelines on income from premium over ₹5 lakh

The Income Tax Department's Central Board of Direct Taxes (CBDT) has issued guidelines on the withdrawal of tax benefits on any sum received under a life insurance policy, including bonuses.

The 17-page guidelines issued by the CBDT explain the changes introduced in the Income Tax Act, which will remove difficulties in implementing the provisions introduced earlier this year.

The income received from an insurance policy is exempted under the Income Tax Act, though the provisions were modified in this year’s Union Budget, excluding exemption to those with annual premiums paid in any of the previous years at ₹5 lakh.

With the latest circular, the CBDT has prescribed a mechanism to calculate income tax from the proceeds of such fat insurance policies, meaning point-by-point examples.

The CBDT says the Finance Act, 2023, has amended clause (100) of section 10 of the Act "by substituting the existing sixth proviso with the new sixth, seventh and eighth provisos.”

“With effect 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 April 1, 2023, will not be exempt under the said clause if the amount of premium payable for any of the previous years during the term of such policy exceeds ₹5,00,000," says the new provisions.

The Finance Act also says if the premium is payable for more than one life insurance policy, the exemption under the said clause will be available only with respect to such policies where the aggregate premium does not exceed ₹5,00,000 for any of the previous years during the term of any of those policies.

The Act also clarifies on GST (Goods and Service Tax) component, saying the premium payable or aggregate premium payable for a life insurance policy, issued on or after April 1, 2023, for any previous year, will be exclusive of the amount of the GST payable on such premium.

Bringing clarity on the premium of a term life insurance policy, the CBDT says the provision of the sixth and seventh proviso of clause (lOD) of section 10 will not be applicable in the case of a term life insurance policy. This means where sum under a life insurance policy is only paid to the nominee in case of the death of the person insured during the term of the policy and no amount is paid to anyone if the insured person survives the policy tenure.

"Hence, any sum received under a term insurance policy shall continue to be exempt under clause (IOD) of section 10 of the Act, irrespective of the amount of the premium payable in respect of such policy. Further the premium paid for such policies shall not be counted for checking ₹5,00,000 limit for the purposes of sixth and seventh proviso."