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Income from maturity of Insurance

Jems (Proprietor) (40 Points)

10 October 2009

Dear All,

What is amount will be offered to tax from maturity of my Life Insurance in case my preium exceeds 20% of sum assured?

What if one take this insurance from insurer aboroad?

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8 Replies

Max Payne (employed) (2574 Points)
Replied 11 October 2009

The entire amount, including any bonus allocated on your policy will be taxable as income from other source.. If it is received on the death of the insured, it wil be exempt.

If your policy was taken before 01.04.2003 then there will be no restriction on the percentage of premium to assured amount, and the entire amount will be tax free.

Section 80C is silent on the nationality of insurance company. However, if the agreement for insurance has been executed in India, the source would be Indian and hence taxable.

If agreement is outside India, Taxability of the proceeds would depend on the residential status of the individual or HUF.

A non resident would be having no tax liability.

An Ordinary resident would have tax liability.

A Resident but not ordinarily resident person will not have tax liability in the absence of business or professional connection of the income with India - so it would not be taxable

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Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 11 October 2009

Dear Mr. Jems,

Section 10(10D) provides exemtion of Bonus + Sum Assurerd on certain Life Insurance products on maturity/death. However, it is to be noted that the said section is not charging section.

The Charging section 3 charges tax on total Income, Income is defined under section 2(24) and includes profit, gains, bonus, accretion etc. and doest not include principal, premium above 20% of sum assured, amount claimed u/s. 80C etc.

In view of above, tax is to be levied on Income and not on principal. It can help u understand in better way with this example

Sum Assured Rs. 1 Cr.

1st and final Premium Rs. 85 lacs.

Life 5 years

In above example, tax shall be levied on Income i.e. 15 lacs and not on the entire amount. Say if we consider 1 cr. maturity as income so taxed may arrive to 34 lacs (slab rate + surcharge + cess) however his actual earning is only 15 lacs and so the net gain in his hands would be loss of 19 lacs over the period of 5 years which is not fair as per my opinion and section 10(10D) is not introduce for taxing such transaction likewise.

Thanks

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Max Payne (employed) (2574 Points)
Replied 11 October 2009

Juzer Bhai nice analysis.

But now i am a little puzzled myself. Section 10(10D) is below, its given that the maturity proceeds wont be exempt if premium exceeds 20% of capital sum assured.

But when we read 80C, then this premium is not allowed as deduction in the first place for computing Total income. So only the gain will be taxable like u said in the year of maturity.

My confusion is below.

Max Payne (employed) (2574 Points)
Replied 11 October 2009

Please see below, i am quoting the effective dates of disallowance under both sections. Pardon my nomenclature - disallowance means i dont get the tax benefit.

If i took a policy in respect of which the annual premium is 25% of capital sum assured on 31.03.2003 then i could claim 80C deduction for 3 premia upto 31.03.2006, The fourth premium would not be allowed as deduction since it will be made on 31.03.2007 (disallowance date passed). So i can claim 75% premia U/s 80C, yet claim entire proceeds exempt U/s 10(10D)? (that way it would be that the 25% premium though i didnt get deduction in the last year, i could earn bonus and interest on it, which would be tax free?) Can such investments be planned?

[(10D wef 01.04.2004) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—

(a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA*; or

(b) any sum received under a Keyman insurance policy; or

(c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured:

Provided that the provisions of this sub-clause shall not apply to any sum received on the death of a person:

Provided further that for the purpose of calculating the actual capital sum assured under this sub-clause, effect shall be given to the ⁸²[Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be].

Explanation.—For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person;]

80C wef 01.04.2006

(3) The provisions of sub-section (2) shall apply only to so much of any premium or other payment made on an insurance policy other than a contract for a deferred annuity as is not in excess of twenty per cent of the actual capital sum assured.

Explanation.—In calculating any such actual capital sum assured, no account shall be taken—

(i) of the value of any premiums agreed to be returned, or

(ii) of any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person.

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 11 October 2009

Dear Friend,

I suggest you to read section 88 of IT Act which is ruled out by Finance Act by introducing subsection 9 to it.

Please let me know if you still find something interesting.

Thanks

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Jems (Proprietor) (40 Points)
Replied 12 October 2009

So what would be taxable? Maturity or Bonus/income part?

Max Payne (employed) (2574 Points)
Replied 12 October 2009

If you wrongly claimed 80C deduction, then revise the previous year's return. only the gain and bonus will be taxable as ur income.

Juzer bhai, thanks for replying my query, and u were rite about HUF. the income will be of the individual only so it would be his status we have to check. Thanks for showing me the correct treatment. Mea culpa Jems!

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