CBDT Issues New Guidelines for Tax Exemptions on Life Insurance Policies

The Central Board of Direct Taxes (CBDT) has introduced a fresh set of guidelines that reshape the landscape of tax exemptions for life insurance policies.

Through a circular dated August 16, the CBDT has unveiled revisions to clause (10D) of section 10 in the Income Tax Act, 1961, affecting the taxability of life insurance policy proceeds and bonuses.

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These modifications come with certain conditions and align with amendments outlined in the Finance Act of 2023.

Key Highlights: The new CBDT guidelines entail significant changes to the taxation framework for life insurance policies. The alterations include:

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  • Premium Threshold for Exemption: Commencing from the assessment year 2024-25, any amount received from a life insurance policy, excluding unit-linked policies, will no longer be eligible for exemption under clause (10D) if the premium paid within a single year during the policy’s term exceeds Rs. 5,00,000. This rule is applicable to policies acquired on or after April 1, 2023.
  • Cumulative Premium Limit: In instances where premiums are being paid for multiple life insurance policies (excluding unit-linked insurance policies), the exemption available under clause (10D) applies solely if the total premiums paid across these policies during any preceding year within their tenure do not surpass Rs. 5,00,000. This provision is also relevant to policies issued on or after April 1, 2023.
  • Exception for Death Benefit: The aforementioned regulations do not extend to the amount received upon the demise of the policyholder.

Impact of Budget 2023: Budget 2023 has led to the removal of tax exemptions for life insurance policies with premiums exceeding Rs. 5 lakh. This substantial change sets the tone for the revised CBDT guidelines.

Additional Taxation Aspect: In a noteworthy inclusion, the CBDT has introduced a fresh clause (Xiii) within sub-section (2) of section 56.

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This provision dictates that if funds are acquired from a life insurance policy and no deduction is claimed under any provision of the Income Tax Act, the received amount will be subject to taxation as income from other sources.

Expert Insights: Om Rajpurohit, Joint Partner (Corporate & International Tax) at AMRG & Associates, elucidated that under the CBDT’s framework, the excess amount received upon maturity of a life insurance policy will be taxed as ‘Income from other sources’.

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Amit Maheshwari, Tax Partner at AKM Global, emphasized that these rule changes are aimed at curtailing tax-saving attempts via investments disguised as insurance policies.



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