All About The New CBDT Rule On Life Insurance Maturity Taxability

A look at the recent CBDT clarifications on the new income tax rule on high-value life insurance policy consideration receipts

Through the Finance Act, 2023, the Central Board of Direct Taxes (CBDT) announced a rule change regarding maturity benefits of life insurance policies (LIP). Accordingly, maturity consideration will be taxable if the aggregate annual premium of Rs 5 lakh or more. 

Also Read: on to know more about the recent CBDT clarifications on this rule change and how it changes the taxability of life insurance maturity proceeds.

Highlights:

1. CBDT introduced income tax on high-value life insurance policies.

2. Policies with annual premiums of up to Rs 5 lakh will remain exempt.

3. Policy buyers must read section 10(10D) in a new light.

Changes in Section 10(10D) 

According to Section 10(10D) of the Income Tax Act, the maturity proceeds of a LIP issued before 1 April 2023 will remain exempt. However, the new rule was inserted for LIPs issued on or after 1 April 2023. Effective this date, the following is applicable,

If consideration is received under one or more LIPs issued after 1 April 2023, and if the aggregate premium payable on such LIPs is less than Rs 5 lakh for all the tax years under the policy term, the consideration will be exempt under section 10(10D).

In the same scenario, if the aggregate premium payable is more than Rs 5 lakh in any of the years, the consideration received for LIPs whose premium was less than Rs 5 lakh will be exempt. The balance amount will be taxable as income.

Various Taxability Scenarios

To understand the taxability further, you must go through the following scenarios –

• Scenario 1 - The LIP(s) date of issue - before 1 April 2023. The aggregate annual premium(s) is less or more than Rs 5 lakh. Verdict - Exempt 

• Scenario 2 - The LIP(s) date of issue - after 1 April 2023. The aggregate annual premium(s) is less than Rs 5 lakh. Verdict – Exempt

• Scenario 3 - The LIP(s) date of issue - after 1 April 2023. The aggregate annual premium(s) is more than Rs 5 lakh. 

In scenario 3, let us assume that you got two policies with premium amounts of Rs 2 lakh and Rs 2.5 lakh in 2023. You bought another policy with a premium of Rs 1.5 lakh in 2024. Here, the consideration received against the first two policies is exempt. However, when you add the third premium, it crosses Rs 5 lakh. So, the consideration against the third LIP will be taxable.

The bottom line

Policy buyers may note that Unit-linked Insurance Policies (ULIPs) and death benefits received against LIPs are excluded from this rule. The consideration received also includes any sum received by way of a bonus, subject to specific exclusions. Policy buyers must consider these recent CBDT rules while planning their non-linked policy purchases.

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Also Read: Maturity Benefits: What You Need To Know When Buying Insurance