CBDT Notifies Rule 11UACA for Computing Taxable Income from Life Insurance Policies
Notification No. 61/2023, dated 16-08-2023
The Finance Act, 2023 has made changes to section 56(2) by adding a new clause (xiii). This new rule talks about when a certain amount is received from a life insurance policy (excluding Unit Linked Insurance Policy and Keyman Insurance Policy) that doesn't qualify for tax exemption under Section 10(10D). Any money gained from this will be considered taxable income under 'Income from Other Sources'.
As a result of this change, the Central Board of Direct Taxes (CBDT) has introduced Rule 11UACA. This rule outlines how to calculate the income in question under section 56(2)(xiii). Here's how the calculation works:
1. Income from First-time Receipt under Life Insurance Policy If someone receives money from a life insurance policy for the first time, the taxable income will be the received amount (including any bonus), minus the total premium paid during the policy's term until the receipt date.
2. Income from Subsequent Receipts under Life Insurance Policy For people who receive money from the same life insurance policy more than once, the taxable income is the received amount during the year, minus the premium paid during the policy term until the receipt date. However, premiums already used to calculate income in previous years won't be considered.
Note: If someone claims a deduction under other tax provisions for the premium paid, that premium amount won't be used to calculate the income.
CBDT Clarifications on Section 10(10D) Exemption for Life Insurance Policies
CIRCULAR NO. 15 OF 2023, dated 16-08-2023
Section 10(10D) allows exemptions for money received from life insurance policies. But if the premium paid for any year during the policy's term goes beyond 10% of the actual capital sum assured, the exemption won't apply ("excess premium policy").
Starting from Assessment Year 2024-25, Section 10(10D) changes again. No exemptions will be given for money received from life insurance policies (except Unit Linked Insurance Policies) issued on or after 01-04-2023 if the annual premium for any previous year during the policy's term exceeds Rs. 5,00,000.
So, for life insurance policies issued on or after 01-04-2023, the exemption under section 10(10D) applies only if:
- The annual premium during any policy year doesn't exceed Rs. 5,00,000.
- The premium is not more than 10% of the sum assured.
If someone pays premiums for multiple policies issued on or after 01-04-2023, the total premiums for all policies should not exceed Rs. 5,00,000 during the term of any of those policies. If the total exceeds this, exemptions will be given only for policies where the total premium doesn't surpass the Rs. 5,00,000 limit.
These changes are clarified further in the circular to help understand situations related to exemptions for life insurance policies issued on or after 01-04-2023 ("eligible life insurance policies").
Situation 1: No Consideration Received or No Exemption Claimed
- If someone receives no money from eligible life insurance policies in a previous year, or if they received money but didn't claim exemption, the following applies:
- If money is received from one policy, exemption applies only if the premium doesn't exceed Rs. 5,00,000.
- If money is received from multiple policies and their total premium exceeds Rs. 5,00,000 in any previous year, exemption applies only for policies where the total premium is within Rs. 5,00,000.
Situation 2: Exemption Claimed for Consideration Received
- If someone gets money from eligible life insurance policies in a previous year and claims exemption under Section 10(10D) for them ("old eligible life insurance policies"), the following applies:
- Exemption is given only if the total premium for eligible and old eligible life insurance policies doesn't exceed Rs. 5,00,000 for any previous year during their terms.
- If the total premium for eligible and old eligible life insurance policies goes over Rs. 5,00,000, exemption is given only for eligible policies where the combined premium doesn't cross Rs. 5,00,000.
Additionally, it's noted that the premium amount or aggregate premium amount for a life insurance policy doesn't include Goods and Service Tax. Also, these rules don't apply to term life insurance policies where the money is paid only if the insured person passes away during the policy's term, and no payment is made if they survive.
