Till now majority of Income from Insurance policy was exempt and some of the policies were only taxable and till now there was no mechanism prescribed by the Income Tax department for calculating tax on such insurance policies.
Clause (xiii) to Section 56(2) was introduced in Income Tax by Finance Act, 2023 to tax income from insurance policies which are not exempt under section 10(10D) of the Income tax act. This came after insurance policies having premium of more than 5 lakh in a year were excluded from exemption list under section 10(10D) of the Income tax act.
Earlier also insurance policies were not fully exempt there was a threshold of premium amount which if exceeded the total sum assured it would result in making the insurance policy taxable. However, till now CBDT has not specifically told under which head such income would be taxable and hence many people were offering it to tax as capital gain as they would consider the investment in insurance policy as capital asset.
Now CBDT has clarified that such proceeds from insurance policy except ULIP (ULIP is taxable under capital gain) would be taxable as income from other sources under section 56(2)(xiii). Section 56(2)(xiii) of the Income tax act as inserted by Finance Act, 2023 is as under:
“(xiii) where any sum is received, including the amount allocated by way of bonus, at any time during a previous year, under a life insurance policy, other than the sum,-
(a) received under a unit linked insurance policy;
(b) being the income referred to in clause (iv),
which is not to be excluded from the total income of the previous year in accordance with the provisions of clause (10D) of section 10, the sum so received as exceeds the aggregate of the premium paid, during the term of such life insurance policy, and not claimed as deduction under any other provision of this Act, computed in such manner as may be prescribed.
Explanation.- For the purposes of this clause “unit linked insurance policy” shall have the meaning assigned to it in Explanation 3 to clause (10D) of section 10.”
Hence, according to the above section any income from insurance policy shall be taxable under income from other sources as per the method prescribed and now CBDT has prescribed the method to calculate income from insurance policy under Rule 11UACA.
In the above section it was mentioned that income from insurance policy will be taxable under the head income from other sources. However, no method was prescribed as to how calculate such income. Now, with notification no. 61 of 2023 Dt. 16.08.2023, CBDT has prescribed the method to calculate income from insurance policy as per Rule 11UACA. Relevant extract of Rule 11UACA is as under:
“11UACA: Computation of income chargeable to tax under clause (xiii) of sub-section (2) of section 56. – For the purpose of clause (xiii) of sub-section (2) of section 56, where any person receives at any time during any previous year any sum under a life insurance policy, then, the income chargeable to tax under the said clause during the previous year in which such sum is received shall be computed in the following manner, namely: —
(i) where the sum is received for the first time under the life insurance policy during the previous year (hereinafter referred to as first previous year), the income chargeable to tax in the first previous year shall be computed in accordance with the formula,—
A-B where, –
A = the sum or aggregate of sum received under the life insurance policy during the first previous year; and
B = the aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum in the first previous year that has not been claimed as deduction under any other provision of the Act;
(ii) where the sum is received under the life insurance policy during the previous year subsequent to the first previous year (hereinafter referred to as subsequent previous year), the income chargeable to tax in the subsequent previous year shall be computed in accordance to the formula,—
C-D where, –
C = the sum or aggregate of sum received under the life insurance policy during the subsequent previous year; and
D = the aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum in the subsequent previous year not being premium which –
(a) has been claimed as deduction under any other provision of the Act; or
(b) is included in amount ‘B’ or amount ‘D’ of this rule in any of the previous year or years
Explanation .– For the removal of doubts, it is clarified that the sum received under a life insurance policy would mean any amount, by whatever name called, received under such policy which is not to be excluded from the total income of the previous year in accordance with the provisions of clause (10D) of section 10, other than the sum–
(a) received under a unit linked insurance policy; or
(b) being the income referred to in clause (iv) of sub-section (2) of section 56.”.”
Considering the above mechanism prescribed by CBDT it can be said that now the proceeds would be directly reduced from the amount invested by a person in insurance policy.
However, in our opinion insurance policies are long term investments for a person and not giving the benefit of indexation and directly reducing the insurance proceeds from amount of premium paid would result in additional taxation and hence CBDT should again decide on taxability of insurance policy as it is more of a investment rather than an income from other sources income.
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