Tax Liability For Life Insurance Payouts If Annual Premiums Cross Rs 5 Lakh
Starting from the assessment year 2024-25, individuals receiving sums from life insurance policies (excluding unit-linked policies) issued after 1 April 2023, will no longer enjoy exemption if the premium paid in a particular year surpasses Rs 5,00,000. In cases where premiums exceed this limit, the maturity proceeds will be treated as part of the individual's income and subjected to taxation based on applicable rates.
For policies exceeding this premium threshold, the aggregate maturity amounts will be liable to income tax. The total premiums for multiple policies must not surpass this limit to be eligible for exemption. Notably, this alteration will not impact sums related to death claims, as outlined in a circular issued by the Income Tax Department.
The circular further states that unclaimed sums from such policies will now be taxable under the category of "Income from other sources."
It's important to note that the taxation provisions for sums received upon the death of an insured individual remain unchanged and continue to be exempt from income tax.
This change in taxation underscores the significance of maintaining a clear distinction between investments and insurance.
Issued on 16 August, the Central Board of Direct Taxes (CBDT) has introduced new guidelines as part of the Income-Tax Act, 1961. These guidelines specifically pertain to clause (10D) of section 10, which addresses income tax exemption for sums received from life insurance policies.
The amendments introduced by the Finance Act, 2023, are as follows:
Premium Limit: Effective from the assessment year 2024-25, sums received under life insurance policies (excluding unit-linked policies) issued after 1 April 2023, will not be exempt if the annual premium payment during any preceding year within the policy term exceeds Rs 5,00,000 (sixth proviso).
Aggregate Premium Limit: For individuals holding multiple life insurance policies (excluding unit-linked policies) issued after 1 April 2023, exemption will apply only if the combined premiums during any preceding years within the policy term do not exceed Rs 5,00,000 (seventh proviso).
Death Claims Exemption: The premium limits specified in the sixth and seventh provisos will not be applicable to sums received upon the policyholder's demise (eighth proviso).
Taxation on Unclaimed Sums: A new clause (xiii) has been introduced in sub-section (2) of section 56, stipulating that sums received under a life insurance policy, which are not claimed as deductions under any other provision of the IT Act, will be taxed under the category "Income from other sources."
Impact on Tax Liability: If sums received under a life insurance policy during a specific year exceed the aggregate premiums paid during the policy term and are not claimed as deductions elsewhere, the surplus amount will be subject to income tax under the heading "Income from other sources."
Before this amendment, individuals enjoyed an income tax exemption under Clause (10D), Section 10 of the Income-Tax Act, 1961. Any sums received under a life insurance policy, including bonuses allocated on such policies, were typically exempt from taxation.
