CBDT issues guidelines on tax exemption for high premium life insurance policies (other than ULIPs) pursuant to Budget 2023 amendments

Section (S.) 10(10D) provides for exemption with respect to sum received under a life insurance policy, including sum allocated by way of bonus, subject to certain specific exceptions. Prior to Finance Act 2023 (FA 2023) amendment, barring unit-linked insurance policies (ULIPs), there was no cap on the amount of annual premium paid by any person during the term of the policy for claiming exemption. 

In order to prevent the misuse of tax exemption by high-net-worth individuals by investing in policies having large premium contributions, FA 2023 amended s.10(10D) to withdraw exemption in respect of life insurance policies issued on or after 1 April 2023 where premium (or aggregate premium) payable for any of the tax year during the term of such policy/policies exceeds INR5 lakhs (except amount received on death of a person). Income from such non-exempt policies [i.e., amount received less aggregate premium paid during term of the policy to the extent not claimed as deduction] shall be taxable under the head “Income from Other Sources”. In case of multiple life insurance policies, exemption is available only to those policies where aggregate premium of all policies does not exceed INR5 lakhs.

Similar provisions were introduced in 2021 in the context of ULIPs where exemption was withdrawn if the annual premium payable on the ULIPs exceeds INR2.5 lakhs. 

Central Board of Direct Taxes (CBDT) issued Circular no.2/2022 dated 19 January 2022 in the context of ULIPs providing guidelines to address situations of multiple policies. A circular on similar lines was awaited in the context of policies other than ULIPs.

The CBDT has now issued Circular no. 15/2023 dated 16 August 2023, which provides following guidelines/clarifications:

• Eligible life insurance policy means any life insurance policy other than ULIP issued on or after 1 April 2023.

• Sum received on life insurance policies (not being a ULIP) issued before 1 April 2023 shall be exempt under S.10(10D) and the premium threshold of INR5 lakhs shall not be applicable in case of those policies and these policies will not be counted for calculating the threshold of INR5 lakhs.

• Further, the guidelines also clarify that in the case of taxpayer holding multiple life insurance policies, taxpayers have a choice to select those policies on which higher premium is paid for determining the threshold of INR5 lakhs. For instance:

In the above illustration, the amount received under policy A will be exempt under S.10(10D) for the tax year 2033-34 since annual premium did not exceed INR5 lakhs for any of the tax years during the term of such policy. In tax year 2034-35, as between Policies B and C, taxpayer has the choice to select the policy on which exemption can be claimed considering that aggregate premium payable on policies A and B or A and C did not exceed INR5 lakhs in any year during the term of such policies. Policy C is more beneficial to taxpayer and can be selected for tax exemption. Amount received under policy D will be taxable. 

• For computing the threshold of INR5 lakhs, the premium payable/ aggregate premium payable for a life insurance policy or policies shall be exclusive of the amount of the Goods and Service Tax (GST) payable on such premium.

• Any sum received under a term life insurance policy (i.e., where the sum under life insurance policy is only paid to the nominee in case of death of the insured during the term of the policy and in case no amount is paid to anyone if the insured person survives the policy tenure) shall continue to be exempt under S. 10(10D) irrespective of the premium payable. Further, premium paid for such policies shall not be counted for checking INR5 lakhs limit.