While Life insurance policies provide low returns, these have long been considered as a safe investment for securing financial stability in the future. However, recent changes in tax rules have brought about significant shifts in how the maturity money from these policies is treated. The Central Board of Direct Taxes (CBDT) has introduced new guidelines that impact the taxation of life insurance maturity proceeds. In this article we would provide new CBDT guidelines on Taxation of Life Insurance Maturity Amount.
CBDT New Rules for Taxing Life Insurance Maturity Money
Central Board of Direct Taxes (CBDT) has recently introduced a set of fresh and comprehensive guidelines that shed light on how the tax-exempt portion of maturity amounts from life insurance policies will be calculated.
- Impact of Premium Paid: One of the most important aspects of these new rules is their direct connection to the premium amount paid by the policyholders. The introduction of this connection has implications for policies purchased on or after April 1, 2023, as the full tax exemption on maturity proceeds might not be applicable.
- Budget 2023 Influence: The background of these new guidelines lies in the amendments introduced in Budget 2023. The government, through this budget, has stipulated that if the cumulative premium paid for a life insurance policy during a financial year surpasses the Rs 5 lakh threshold, the maturity amount from that policy will be subjected to taxation.
- Exemption for ULIPs: These changes are not applicable for unit-linked insurance plans (ULIPs). ULIPs retain their unique taxation structure and remain unaffected by these alterations.
- Transition Period: Policies issued before March 31, 2023, continue to enjoy the privilege of full tax exemption on their maturity proceeds, regardless of the premium amount paid during the policy term. The new guidelines, in all their specifics, apply solely to policies issued on or after April 1, 2023.
- Taxation Criteria and Scenarios: The taxable aspect of maturity proceeds hinges on the historical premium payment pattern. If the sum total of premiums paid in previous years during the policy term overshadows the Rs 5 lakh mark, the maturity proceeds of the policy then fall under the taxation umbrella. This criterion holds for both single policies as well as multiple policies held by an individual.
- Switching Premium Modes and Tax Implications: Policy holders are requested to exercise caution when looking for a change in the premium payment mode. Shifting from annual to semi-annual or quarterly payments, can potentially push the aggregate premium above the Rs 5 lakh threshold. Consequently, such a switch could render the maturity proceeds taxable.
- Taxability Exceptions: The new taxation rules comes with an exception in case of policyholder’s demise. Irrespective of the premium amount paid, if the policyholder passes away, the maturity proceeds remain tax-free. In these cases, the taxable amount is classified under ‘Income from other sources,’.
- Calculation Examples for Clarity: The CBDT circular takes a proactive approach in clarifying the application of the new rules. It provides illustrative examples that serve as practical guides for individuals seeking to comprehend how the tax-exempt portion of life insurance proceeds will be calculated when the premium paid during previous years exceeds Rs 5 lakh.
- Taxation Rate and Planning: The taxability of maturity proceeds aligns with the individual’s applicable income tax slab rates. This connection underscores the importance of comprehensive tax planning, ensuring that policyholders consider the broader implications of their investment decisions.
Example by CBDT on how taxation would be done on Life insurance maturity amount
The assessee has the following policies all of which satisfy all the conditions laid down in clause (100) of section 10 of the Act (other than the conditions provided under the sixth and seventh proviso of the said clause, applicability whereof is being explained in the example). The assessee did not receive any consideration under any other eligible life insurance policy in earlier previous years preceding the previous year 2033-34.
Here are the Taxability as per seventh proviso to clause (100) of section 10 of the Act: The consideration under life insurance policy “X” will be exempt under clause (100) of section 10 of the Act as the policy has been issued before 01.04.2023 and it is not covered by recently introduced provisions.
- The consideration received under life insurance policy “C” will not be exempt under clause (I00) of section 10 of the Act as per the provisions of seventh proviso since aggregate of the annual premium payable for life insurance policy “A”, life insurance policy “8 ‘ and life insurance policy “C” exceeds Rs 5,00,000 during the term of these policies.
- However, the consideration received under life insurance policy “A” and “B” shall be exempt under clause (I00) of section 10 of the Act, since aggregate of annual premium payable for these two policies does not exceed Rs 5,00,000 for any previous year during the term of these two policies.
You can check more examples on CBDT New rules on Life Insurance Maturity amount here.
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