Is the amount received as a redemption from a life insurance policy exempt from taxation?
In accordance with the provisions of Section 10 (10D) of the Income Tax Act of 1961 (‘the Act’), any sum received under a life insurance policy, including the sum allocated by way of bonus other than the amount received under the circumstances below, is exempt from tax.
• Any sum received under subsection (3) of section 80DD or subsection (3) of section 80DDA*; either
• Any sum received under a Keyman insurance policy; either
• Insurance policy issued on or after April 1, 2003, but before March 31, 2012, in which the premium payable for any year during the term of the policy exceeds 20 percent of the sum insured.
• Insurance policy issued on or after April 1, 2012, when the premium payable for any year during the term of the policy exceeds 10 percent of the sum insured (provided the policy is issued after April 1, 2013, for life insurance on a severely disabled person under section 80U or sickness or disease under section 80DDB, 10 percent will be replaced by 15 percent)
*Section 80DDA is replaced by Section 80DD, effective April 1, 2004.
In addition, the Finance Act of 2021 inserted a condition in Section 10(10D) of the Act, whereby the above exemption would not be available for any Unit Linked Insurance Premium (ULIP) issued on or after February 1 of 2021, where the premium payable for any year during the term of the policy exceeds ₹ 2.50 lakh. In addition, the government vide Notification no. 8/2022 of January 18, 2022 and Circular no. 2/2022 have notified the calculation method of capital gains with respect to ULIPs
In addition, the surrender value of a life insurance policy is allowed as a tax-free benefit only if it meets the following conditions:
• If it is a single premium policy, the surrender value would be tax-free if the plan is surrendered after the end of the first two years.
• In any other case, the surrender value would be tax-free if the first two years’ premiums have been paid in full and the plan is then surrendered.
• In the case of ULIP, the surrender value would be tax-free if the plan is surrendered after the end of the first five years of the plan.
The writer is a practicing public accountant.
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April 30, 2022