Ad-Free CAclubindia and Daily Updates on your mobile. Subscribe Now!

LIC

Suresh Pai S (Tax Consultant) (1029 Points)

21 February 2017

What portion is taxed in lic maturity amount?

Reply
Follow
Share

5 Replies

Sanjay S (Chartered Accountant) (1375 Points)
Replied 22 February 2017

Two aspects to taxability of LIC policies:

1. Premium paid on LIC [Deduction u/s 80C]:
If premium does not exceed 10% of sum assured, then full amount can be claimed u/s 80C
If premium exceeds 10% of sum assured, then deduction shall be restricted to 10%.

2. Maturity Proceeds of LIC [Exemption u/s 10(10D)]:
If premium on policy had never exceeded 10% of sum assured, then maturity proceeds shall be exempt u/s 10(1D).
If premium on policy had exceeded 10% of capital sum assured, then exemption u/s 10(10D) not available.

1 Like

Upgrade to CAclubindia Pro. Subscribe Now!

Suresh Pai S (Tax Consultant) (1029 Points)
Replied 22 February 2017

Yes. I will agree on that. But this section confuses me because maturity amount includes the income we have saved isn't it? How do they tax that portion? Or do they tax only the bonus? I think they don't specify anything in this regard.

(Guest)

LIC maturity amount not exempt u/s 10(10D) will be taxed fully. It appears in the way the section is drafted that even the premiums paid are not allowed to be deducted. (They were not allowed deduction even u/s 80C). Looks unfair.

This is like taxing pension received from pension policies even if we have paid pension premiums before.

any more views are welcome.

1 Like

Sanjay S (Chartered Accountant) (1375 Points)
Replied 22 February 2017

Well, now coming to the issue of 'HOW MUCH TO TAX if 10(10D) is not available?'

It is true that where premium paid is exceeding 10% of sum assured, the entire proceeds would get taxed and that it seems unfair to tax something thats already been taxed. But, this is how I would do it:

Treat the whole thing as capital gain, by treating it as an investment. Anything that generates return may be termed as an investment right?

LOGIC:

Issue #1 - Whether it is a capital asset? It is one, because the definition of capital asset u/s 2(14) is an inclusive one. It includes "Any kind of property held by an assessee, whether or not connected with business or profession of the assessee." Hence you may even include an investment in LIC.

Issue #2 - Whether there is transfer? The definition of the term “transfer” includes extinguishment, and when a part of the policy matures and proceeds are paid to the policyholder, there is a partial extinguishment of the policy. There is, therefore, a transfer of a part of the capital asset.

Hence, the capital gain computation shall be:

Maturity proceeds of policy (eg. Rs.100)= sale consideration of investment.

Less: Premium paid (eg. Rs. 80)= Cost of acquisition of investment. --> You may even apply indexation on this depending on the life of policy.

Net Capital gain (on Rs. 20 only) -> taxable @ 20% (if indexed) or 10% (if not indexed)

Hence the key to interpreting the definition of capital asset is crucial.

If you dont do the above, you will end up paying tax on Rs. 100 in the instances where you dont have exemption u/s 10(10D).

Hope this helps.

Disclaimer: This is not a legal opinion.Some AOs may not agree with this treatment. Hence its always arguable. This treatment has not been disallowed in my case.

1 Like

Marie Shree (CA) (2 Points)
Replied 22 October 2017

I took cashback at the end of 10 year plan and % of interest i had to pay was very less. Mentioned in their LIC india Loign website, It is better to contact your agent for more information.