How exemptions for insurance policies work
The Finance Act, 2023, amended section 10(10D) of the Income Tax (I-T) Act to remove the exemption available to sum received from a life insurance policy in case the aggregate premium for all policies issued on or after the 1 April exceeds 5 lakh. On 16 August, the Central Board of Direct Taxes issued a circular clarifying this. If premium is payable for more than one life insurance policy, issued on or after 1 April, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed 5 lakh for any of the previous years during the term of any of those policies.
For instance, Jayesh holds insurance policy A issued on 1 April and pays premium of 5 lakh for 10 years until 1 April 2032. Then he purchases insurance policy B on 1 April 2033 and pays premium of 5 lakh for another 10 years until 1 April 2042. On 1 April 2043, he receives 50 lakh from life insurance policy A on maturity and on 1 April 2046 he gets 60 lakh from insurance policy B on maturity. In this case, the consideration received from both the policies A and B shall be exempt as the aggregate of the annual premium payable for the life insurance policies A and B together did not exceed 5 lakh for any of the previous years during the term of the policies.
The above amendments are for life insurance policies other than a unit-linked insurance policy (ULIP). Let’s take the example of Rekha who holds the following life insurance policies and ULIPs (see graphic). The surrender value of ULIP X will be exempt under section 10 (10D) since the annual premium does not exceed 2.5 lakh during the term of the policy. Further, the consideration received under the life insurance policy A during the previous year 2033-34 shall also be exempt. However, since the sum of premium of life insurance policies A, B and C exceeds 5 lakh during the term of these policies, Rekha should analyse whether she should claim the exemption or not. If she claims the exemption for policy A then for the previous year 2034-35, the consideration for life insurance policy C alone shall be exempt under section 10(10D) as the sum of premium of life insurance policies A and C does not exceed 5 lakh in any of the previous years during the term of these policies. Life insurance policy C is preferred over life insurance policy B being more beneficial. However, if the consideration from life insurance policy A is not claimed as exempt in previous year 2033-34, then the consideration from both the life insurance policies B and C shall be exempt.
The above provisions for taxability of consideration from insurance policy with premium exceeding 5 lakh shall not apply in case of any sum received on the death of a person. Under term life insurance, policy amount is paid to the nominee in case of the death of the person insured during the term of the policy and no amount is paid to anyone if the insured person survives the policy tenure. Hence, any sum received under a term insurance policy shall always remain exempt irrespective of the premium paid. Further, the premium paid for such policies shall not be counted for checking 5 lakh limit. It is also clarified that the premium payable or aggregate premium payable for life insurance policies shall be exclusive of the amount of the goods and service tax (GST) payable on such premium.