• Notification Date: 18-08-2023
• Notification No: N/A

CBDT issues New Guidelines on Income Tax Exemption on Money received from Life Insurance Policy

The Central Board of Direct Taxes (CBDT) has issued fresh guidelines under clause (10D) of Section 10 of the Income Tax Act 1961. Clause 10(D) of Section 10 of the IT 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. However, such an exemption is subject to certain exclusions. 

The CBDT guidelines have come after the Finance Act 2023 removed tax exemption on any sum received from life insurance policies for which the aggregate annual premium is more than Rs 5 lakh. 

New Changes brought by the Finance Act 2023  

1. Premium paid for a single policy: As per Finance Act 2023, any sum received under a life insurance policy, other than a unit-linked insurance policy, issued on or after 1 April 2023 will not be exempt under Clause 10(D) of Section 10 of the IT Act if the amount of premium payable for any of the previous years during the term of such policy is more than Rs 5 lakh. This will be applicable from AY 2024-25. 

2. Premium paid for multiple life insurance policies: For policies issued on or after 1 April 2023, exemption under Clause 10D will not be available for any policy for which the total annual premium is more than Rs 5 lakh in any year during the policy term. 

“if premium is payable for more than one life insurance policy, other than a unit linked insurance policy, issued on or after 01.04.2023, the exemption under the said clause shall be available only with respect to 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,” CBDT said. 

However, the exemption will be available for any amount paid as a premium in case of the death of the policyholder and in case of term insurance plans as well. 

The Finance Act 2023 also inserted a new clause (xiii) in sub-section (2) of section 56. According to this clause, any amount received as a bonus from a life policy in a previous year will be chargeable to income tax under the head “income from other sources”. 

The CBDT said such bonus amount “is not to be excluded from the total income of the previous year in accordance with provisions of clause (10D) of Section 10.” 

“…the sum so received as exceeds the aggregate of the premium paid, during the term of such life insurance policy, and not claimed as deduction in any other provision of the Act, computed in the manner as may be prescribed shall be chargeable to income-tax under the head ‘Income from other sources’,” CBDT said. 

New Guidelines 

The CBDT has issued new guidelines for the implementation of the above-mentioned provisions of the Finance Act 2023. “Consideration received during the previous year under an eligible life insurance policy shall be exempt or not exempt under clause (100) of section 10 of the Act, subject to the satisfaction of other provisions of said clause,” CBDT said in a circular dated August 16, 2023. As per the CBDT’s guidelines, the following are ways in which exemption under clause 10D of Section 10 will be determined. 

Situation 1: When no consideration or sum has been received by the assessee during any previous year preceding the current previous year or when consideration has been received on eligible policies but has not been claimed exempt. 

1. If any sum or consideration has been received for one policy during the current previous year and the amount of premium paid is not more than Rs 5 lakh in any previous year during the term of the policy then such sum will be eligible for exemption under clause 10D of section 10D subject to fulfilment of other conditions. 

2. If any sum has been received during the current previous year under one life insurance policy only and the premium paid on this policy is over Rs 5 lakh in any previous year then such sum will not be eligible for exemption under Clause 10(D). 

3. If any sum has been received during the current financial year under more than one eligible life policy and the aggregate of the premium paid on all such policies in any previous year is not more than Rs 5 lakh then such sum will be eligible for exemption under Clause 10(D) subject to fulfilment of other conditions. 

4. If any sum has been received during the current previous year under more than one life policy and the aggregate of premium paid is over Rs 5 lakh on such policies in any previous year then the exemption will be available only for those policies for which the premium payable is not more than Rs 5 lakh in any previous year during their term. 

Situation 2: Any sum or consideration has been received by the assessee under any one or more eligible life insurance policies during any previous year preceding the current previous year and it has been claimed exempt under clause (10D) of section 10 of the Act. In this case, the exemption will be determined as under: 

1. If any sum or consideration has been received during the current previous year under one eligible life insurance policy only and the aggregate amount of premium payable on such eligible life insurance policy and old eligible life insurance policies does not exceed Rs 5 lakh then such sum under eligible life policies will be eligible for exemption under clause (10D), provided it is not excluded under sub-clauses (a) to (d) of said clause (l0D); 

2. If any sum has been received during the current previous year under one eligible life insurance policy only and the aggregate amount of premium payable on such eligible life insurance policy and old eligible life insurance policies exceeds Rs 5 lakh for any of the previous years during the term of such eligible life insurance policy, then such sum will not be eligible for exemption under clause (10D) 

3. If any sum has been received during the current previous year, under more than one eligible life insurance policy and the aggregate of the amount of premium payable on such eligible life insurance policies and old eligible life insurance policies do not exceed Rs 5 lakh for any of the previous years during the term of such eligible life insurance policies, then such sum will be eligible for exemption under the clause (10D), provided it is not excluded under subclauses (a) to (d) of clause (10D); 

4. If any sum has been received during the current previous year, under more than one eligible life insurance policy and the aggregate of the amount of premium payable on such eligible life insurance policies and old eligible life insurance policies exceed Rs 5 lakh for any of the previous years during the term of such eligible life insurance policies, then the sum received from only such policy will eligible for an exemption for which the aggregate amount of premium along with the aggregate amount of premium of old eligible life insurance policies do not exceed Rs 5 lakh in any of the previous years during the term of any of such eligible life insurance policies, provided it is not excluded under sub-clauses (a) to (d) of clause (10D). 

GST to be exclusive of premium 

The CBDT further said, “the premium payable/aggregate premium payable for a life insurance policy/policies, other than a unit linked insurance policy, issued on or after the 1st day of April 2023, for any previous year, shall be exclusive of the amount of the Goods and Service Tax payable on such premium.”