CBDT notifies new rules to calculate policy maturity proceeds, no exemptions under 10(10D) for high-premium life insurance

The Central Board of Direct Taxes (CBDT) has formulated new rules for calculating income received from life insurance policies where the premium exceeds Rs 5 lakh. In a significant move, the regulatory body has ordained that Section 10 (10) of the Income Tax Act will not apply to policies with a premium above Rs 5 lakh. The clause is effective from April 1, 2023.

Section 10 (10) of the Income Tax Act exempts certain sums received under a life insurance policy, including those allocated by bonuses. However, this exemption will no longer be applicable under the new CBDT stipulations. This initiative clarifies and avoids confusion when computing income from hefty life insurance policies.

Sunil Sharma, President, Chief Actuary & Chief Risk Officer, Kotak Mahindra Life Insurance said, "In case of multiple non-Unit Linked policies bought on or after April 1, 2023 the exemption shall be available only to such policies for which the aggregate annual premium does not exceed Rs 5 lakh during the term of those policies.The clarification will help policyholder to plan for the non linked policies during FY24."

According to a CBDT notification, clause (10D) of section 10 of the Income-tax Act, 1961 (the Act) provides for income-tax exemption on any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy subject to certain exclusions. 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, shall 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 Rs 5,00,000."

Moreover, suppose the premium is payable for more than one life insurance policy, other than a unit linked insurance policy, issued on or after 01.04.2023. In that case, the exemption under the said clause shall be available only concerning such policies where the aggregate premium does not exceed Rs 5,00,000 for any of the previous years during the term of any of those policies. However, the provisions shall not apply in case of any sum received on the death of a person.

Naval Goel, Founder and CEO of PolicyX.com, said, "Before the announcement of no exemptions under section 10(10D) of The Insurance Act, people were using life insurance policies for bigger investments. Whereas, insurance should be used for protection and not for investment purposes. So, to eradicate this, it is a good move to allow no exemptions for costly life insurance policies with a premium of more than Rs 5 lakh."

"It may be noted that Finance Act, 2021 had earlier inserted, fourth to seventh provisos in clause (10D) of section 10 to provide that the sum received under any unit linked insurance policy [ULIP] (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). It was also provided that if the premium is payable for more than one ULIPs, issued on or after the 01.02.2021, the 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 of the previous years during the term of any of the policies (fifth proviso)," as per the CBDT circular.

CBDT explains the above guidelines with the help of the examples. Some of them are listed below:

Example 1:

The assessee has the following policy, which satisfies all the conditions in clause (10D) of section 10 of the Act. The sum received on maturity will be exempt under clause (10D) of section 10 of the Act as the policy has been issued before April 1, 2023. 

Example 2: 

The assessee has the following policy, which satisfies all the conditions in clause (10D) of section 10 of the Act. The taxpayer did not receive any consideration under any other eligible life insurance policy in previous years preceding FY 2033-34. In this case, the consideration received will not be exempt under clause (10D) of section 10 of the Act since the annual premium payable on the policy exceeded Rs 5,00,000.

Example 3:

The assessee did not receive any consideration under any other eligible life insurance policy in previous years preceding 2033-34. The consideration received will be exempt under clause (10D) of section 10 of the Act since the annual premium payable on the policy does not exceed Rs 5,00,000 in any of the previous years during the policy term.

Example 4:

The assessee did not receive any consideration under any other eligible life insurance policy in previous years preceding 2033-34. Here, the consideration received under a life insurance policy (B) will not be exempt under clause (10D) of section 10 of the Act since the aggregate of the annual premium payable for life insurance policy "A" and life insurance policy " B " exceeds Rs 5,00,000 during the term of these policies. However, the consideration received under a life insurance policy "A" shall be exempt under clause (10D) of section 10 of the Act since its annual premium does not exceed Rs 5,00,000 in any previous years during the policy term.