Central Board for Direct Tax (CBDT) under Department of Revenue in Ministry of Finance issued notification (No. 61/2023) regarding the Income Tax Amendment (Sixteenth Amendment) Rules, 2023 is a set of rules introduced as part of the Finance Act, 2023. The new guidelines for tax exemptions under the amended section 10 (10D) of the Income Tax Act, 1961, state that the maturity sum received from life insurance policies will be subject to taxation if the annual premium exceeds Rs.5 lakh.
- The insertion of a new clause (xiii) in sub-section (2) of section 56 of the Income Tax Act, 1961, is related to the amendment mentioned in the Income Tax Amendment (Sixteenth Amendment) Rules, 2023.
- This new clause (xiii) introduces a specific provision that addresses the tax treatment of sums received under a life insurance policy.The tax treatment of life insurance policies refers to how the proceeds or benefits received from these policies are treated for taxation purposes
- Rule 11UACA provides the methodology for computing the income chargeable to tax under clause (xiii) of sub-section (2) of section 56 of the Income Tax Act, 1961.
Note – The Finance Act is an annual legislation in India that outlines the amendments, modifications, and changes to various tax laws, including the Income Tax Act, 1961.
The key changes introduced through the amendment are as follows:
Under the previous rules specified in section 10 (10D) of the Income Tax Act, 1961, the maturity sum of a life insurance policy, along with any bonuses, was not subject to taxation.
- However, the amendment to Clause (10D) of section 10 of the Income Tax Act, 1961, stipulated that the maturity sum received from life insurance policies issued on April 1, 2023, or after, will be taxable if the yearly premium exceeds Rs 5 lakh.
The new provisions specify that starting from the FY 2023-24 (Assessment Year 2024-25):
i.Premium Limit for Exemption: Sums received from life insurance policies (except Unit Linked Insurance Policies(ULIP)) issued on or after April 1, 2023, will not be eligible for exemption under Clause (10D) if the aggregate premium payable for any previous year during the policy term exceeds Rs.5 Lakhs(Rs.5,00,000).
ii.Multiple Policies Aggregate Limit: If you have multiple life insurance policies (excluding unit linked policies) issued after April 1, 2023, the tax exemption will only apply to policies where the total premium paid in any previous year doesn’t exceed Rs. 5 lakhs for the entire duration of those policies.
iii.Exception for Death Claims: These conditions won’t apply to sums received on a person’s death. In case of claims received due to the demise of an insured person, the new provisions will not be applicable.
Note: The Union Budget 2023-24 introduced a change in the tax treatment of life insurance policies, with the exception of Unit Linked Insurance Policies (ULIPs).
- Unit Linked Insurance Plans (ULIPs): ULIPs combine life insurance coverage with investment. The tax treatment varies based on whether the policy is primarily an insurance product or an investment product. The premium paid for insurance coverage is eligible for deduction, and the tax treatment of investment gains depends on the holding period and other factors.
The New Rules-11UACA:
Rule 11UACA” is a reference to a specific rule introduced as part of the Income Tax Amendment (Sixteenth Amendment) Rules, 2023.
- Rule 11UACA has been established to regulate the determination of income associated with the maturity proceeds of life insurance policies issued after 1 April 2023, when the premiums paid exceeds Rs. 5 lakh.
- The rule makes distinctions in the calculation methodology based on whether the sum is received for the first time or in subsequent years under the life insurance policy.
A new clause (xiii) has been introduced in sub-section (2) of section 56
- It states that if any sum, including bonuses, is received during a previous year under a life insurance policy (excluding unit linked policies), which isn’t excluded from total income under clause (10D) of Section 10, the portion exceeding the aggregate premiums paid during the policy term (and not claimed as a deduction elsewhere in the Act) will be taxed under the head “Income from other sources.”
- A new sub-clause (xviid) is added to clause (24) of Section 2, specifying that income includes any sum mentioned in clause (xiii) of sub-section (2) of section 56.