CBDT Notifies New Guidelines For Tax Exemptions Under Section 10(10D) For High Premium Life Insurance Policy

CBDT notification amended clause (10D) of section 10 of the Income Tax Act. Section 10 grants exemptions for certain sums received from life insurance policies, including those attributed to bonuses

The CBDT said, "With effect from the assessment year 2024-25, the sum received under a life insurance policy, other than a unit-linked insurance policy, issued on or after April 1, 2023, shall not be exempt under the said clause if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 5,00,000."

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The Income Tax department on Tuesday introduced notified a new guideline for calculating income from life insurance policies where premiums exceed Rs 5 lakh. The notification amended clause (10D) of Section 10 of the Income Tax Act. Section 10 previously grants exemptions for certain sums received from life insurance policies, including those attributed to bonuses. However, effective April 1, 2023, these exemptions are no longer applicable, as per the CBDT circular.

The Central Board of Direct Taxes (CBDT) circular said, "Clause (10D) of Section 10 of the Income-tax Act, 1961 (the Act) provides for income-tax exemption on any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy subject to certain exclusions. With effect from the assessment year 2024-25, the sum received under a life insurance policy, other than a unit-linked insurance policy, issued on or after April 1, 2023, shall not be exempt under the said clause if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 5,00,000."

Further, if the premium is payable for more than one life insurance policy, other than a unit-linked insurance policy, issued on or after April 4, 2023, the exemption under the said clause shall be available only with such policies where the aggregate premium does not exceed Rs 5,00,000 for any of the previous years during the term of any of those policies. However, the provisions shall not apply in case of any sum received on the death of a person.

The circular said, "It may be noted that Finance Act, 2021 had earlier inserted, fourth to seventh provisos in clause (10D) of section 10 to provide that the sum received under any unit linked insurance policy [ULIP] (except any such sum received on the death of a person), issued on or after the 01.02.2021 shall not be exempt under said clause, if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs 2,50,000 (fourth proviso).

"It was also provided that if the premium is payable for more than one ULIPs, issued on or after the February 1, 202, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 2,50,000 for any of the previous years during the term of any of the policies (fifth proviso)," as per the CBDT circular.

The income tax department also provided explanations for the new guidelines using examples.

1. A person has a policy that meets all the conditions of Section 10 (10D) of the Act. If the policy was issued before April 1, 2023, the money received upon maturity will be tax-exempt under this clause.

2. A person has a policy that satisfies all conditions in Section 10 (10D) of the Act. If they didn't get money from any other eligible life insurance policy before FY 2033-34 and the policy's annual premium was over Rs 5,00,000, the received money won't be tax-exempt under this clause.

3. A person didn't get money from any other eligible life insurance policy before 2033-34, and the policy's annual premium didn't go over Rs 5,00,000 in any previous years during the policy term. In this case, the received money will be tax-exempt under this clause.

4. A person didn't get money from any other eligible life insurance policy before 2033-34. If the total annual premium for life insurance policies "A" and "B" went over Rs 5,00,000 during their terms, the received money from policy "B" won't be tax-exempt under this clause. However, the received money from policy "A" will be tax-exempt since its annual premium didn't exceed Rs 5,00,000 in any previous years during the policy term.