Here’s all you need to know about the taxability of life insurance policies from April 1

The income tax department has issued a new circular clarifying rules on the taxability of non-unit-linked life insurance policies. This follows the Budget announcement that the maturity amount of traditional policies that have an aggregate premium exceeding Rs 5 lakh will be taxable. Yeeshu Sehgal, Head of Tax Market at tax and consulting firm AKM Global, talks to Teena Jain Kaushal about the fine print of the new rule. Edited excerpts: 

BT: What points should one keep in mind to know if the insurance policy is eligible for tax exemption under section 10(10D)?  

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YS: Points to be kept in mind to determine whether the consideration received under a life insurance policy will be exempt under Section 10(10D) of the Income-tax Act, 1961 (“the Act”):  

The sum payable in any year during the duration of any insurance policy shall not exceed 10 per cent of the actual capital sum assured by the policy.  
In the case of a Unit-linked Insurance Plan (ULIPs), taken on or after the February 1, 2021, the premium paid in any year during the life of the policy shall not be more than Rs 2.5 lakh.  
In case of an insurance policy (other than ULIPs), taken on or after April 1, 2023, the premium paid in any year during the life of the policy shall not be more Rs 5 lakh.  
Where the person has taken more than one insurance policy, the exemption will not be available for those insurance policies where the premium payable is more than the threshold limit.  
BT: How is the threshold limit of Rs 5 lakh calculated?  

YS: The threshold limit of Rs 5 lakh will be calculated by aggregating the annual premium payable under insurance policies taken by the person on or after April 1, 2023. However, if the annual premium for any insurance policy is less than the threshold limit, it will be eligible for exemption under the Income Tax Act.   

BT: Will there be no tax on the maturity of insurance policies bought before April 1, 2023, even if the aggregate premium amount is more than Rs 5 lakh?  

YS: The amendment under section 10(10D) was introduced for insurance policies (other than ULIPs) issued on or after April 1, 2023, and not for policies issued before that. However, it is to be kept in mind that premiums payable in any year during the life of such insurance policies taken before April 1, 2023, shall not exceed 10 per cent of the actual capital sum assured by the policy to take the exemption under section 10(10D).  

BT: If I have bought three policies A, B and C with premiums of Rs 1 lakh, Rs 2 lakh and Rs 4 lakh. How will tax be calculated at maturity?  

YS: Since the aggregate of annual premiums payable under policies A & B does not exceed Rs 5 lakh during the year, the consideration that will be received under these policies at the time of maturity will be exempt under section 10(10D) of the Act. However, when the aggregate of policies A & B is taken with policy C, the threshold limit is exceeded. Hence, Policy C will not be eligible for exemption at the time of maturity.  

BT: What will happen if I bought an insurance policy of Rs 90,000 in 2022 and subsequently two policies of Rs 7 lakh and 5 lakh each in 2023? Will all policies become taxable at maturity?  

YS:

Particulars	Policy A	Policy B	Policy C
Annual Premium	90,000	7,00,000	5,00,000
Sum Assured	9,00,000	70,00,000	50,00,000
Issued on	01.04.2022	01.04.2023	01.04.2024

The consideration under Policy A will be exempt since it has been issued before 1st April 2023, and the annual premium payable for any of the years during the term of the policy does not exceed ten per cent of the actual capital sum assured. The consideration received under life insurance policy B will be taxable since the threshold of INR 5,00,000 is crossed, and similarly, the consideration received under Policy C will be taxable.