How Life Insurance Premiums Are Taxed? What Are The Loopholes?

Before April 2023 an individual was allowed to pay any sum of money as a premium for a life insurance policy and enjoy tax exemption on the entire premium upon maturity. This was one of the major tax benefits for life insurance policyholders. The Budget 2023 had made income from insurance policies (other than ULIPs for which there are separate provisions) having premium or aggregate of premium above Rs 5 lakh in a year as taxable. Such income is exempt if it is received on the death of the insured person. This income shall be taxable under the head “income from other sources”. Says Tarun Garg, director, Deloitte India: “The Unit Linked Insurance Policies (‘ULIPs’) have a separate rule with a lower cap of Rs 1.50 lakh for tax deductions under Section 80C. ULIPs enjoy tax-exempt status on maturity under Section 10(10D), provided the premium does not exceed the limit of Rs 2.5 lakh per year. For ULIPs issued on or after 01 February 2021, if the annual premium exceeds Rs 2.5 lakh, the maturity proceeds are taxable as long-term capital gains (LTCG) at maturity taxed at 10 per cent. This rule aims to curb the misuse of ULIPs for tax-free income. The ULIPs purchased before 01 February 2021, are tax-free at maturity, regardless of the annual premium amount. The death benefits from ULIPs are tax-free.”Section 10(10D) provides for exemption concerning any sum received under other life insurance policies, including the sum allocated by way of bonus on such policy. However, exemption under Section 10(10D) is not available in respect of excess premium policies issued on or after 01-04-2003 and high premium policies issued on or after 01-04-2023. Thus, any sum received under such policies is considered income and chargeable to tax under the head “Income from Other Sources.”“The sum received under excess or high premium life insurance policies is chargeable to tax under the head ‘other sources’ as per Section 56(2)(xiii). The Central Board of Direct Taxes (CBDT) has notified Rule 11UACA prescribing manner to compute income in respect of sum received under excess or high premium life insurance policies,” says Rahul Singh, senior manager, Taxmann, tax and corporate advisor. Also read; Taking Loan Against Your Life Insurance Policy: All That You Should Know

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