Direct Tax Alert - CBDT issues circular and notifies Rules to give effect of amended section 10(10D) and 56(2)(xiii) of the IT Act

Background:

Section 10(10D)¹ of the Income-tax Act, 1961 (IT Act) provides for income-tax exemption on any sum received under a life insurance policy (LIP), including the sum allocated by way of bonus on such policy subject to certain exclusions. The Finance Act 2023, (Finance Act) inter-alia amended section 10(10D) of the IT Act by substituting the existing sixth proviso with the new sixth, seventh and eighth provisos to, inter-alia, provide that:

• With effect from Fiscal Year (FY) 2023-24, the sum received under a LIP, other than a unit linked insurance policy (ULIP), issued on or after 1 April 2023, shall not be exempt if the premium payable for any of the FYs during the term of such policy exceeds INR 0.5mn [sixth proviso];
• If the premium is payable for more than one LIP, other than a ULIP, issued on or after 1 April 2023, the exemption shall be available only concerning such policies where the aggregate premium does not exceed INR 0.5mn for any of the FYs during the term of any of those policies [seventh proviso];
• The sixth and seventh proviso shall not apply in case of any sum received on the death of a person [eighth proviso];
• The Central Board of Direct Taxes (CBDT) is granted authority to formulate guidelines, subject to prior clearance from the Central Government [ninth proviso].

Further, section 56(2)(xiii) of the IT Act was inserted by the Finance Act. Section 56(2)(xiii) of the IT Act provides for the taxability of any sum received under a LIP (other than ULIP and Keyman Insurance Policy), to which exemption under section 10(10D) of the IT Act does not apply. Any income arising from such receipt shall be chargeable to tax as ‘Income from Other Sources’. The sum is required to be computed in the prescribed manner.       

Accordingly, in the exercise of the powers granted under section 10(10D) of the IT Act, the CBDT has recently issued a circular² to formulate guidelines addressing any challenges that may arise in implementing the provisions of section 10(10D) of the IT Act. Further, in the exercise of the powers granted under section 56(2)(xiii) of the IT Act, the CBDT also issued a notification³ to introduce Rule 11UACA in the Income-tax Rules, 1962 (IT Rules) for calculating income on the sum received upon maturity of LIPs where the premium exceeds INR 0.5mn and such policies are issued after 1 April 2023. We, at BDO India, have analysed and summarised the said circular and notification and provided our comments on its impact hereunder:

Notification:

• The CBDT inserted Rule 11UACA in the IT Rules for computing the taxable income under section 56(2)(xiii) of the IT Act with respect to the sum received upon maturity of LIPs wherein the premium amount exceeds INR 0.5mn and such policy/policies are issued on or after 1 April 2023. The Rule provides that:
  • If the taxpayer has received the sum from such LIP for the first time, then the income chargeable to tax shall be:
    A-B, where;
    A= the amount received, including the amount allocated by way of bonus; and
    B= the aggregate of premium paid during the term of such policy, till the date of receipt of such sum that has not been claimed as deduction under any other provision of the IT Act.
  • If the taxpayer has received the sum under the LIP for second and subsequent times, then the income chargeable to tax shall be:
    C-D, where;
    C= the amount received during the subsequent FY; and
    D= the aggregate of premium paid during the term of the LIP till the date of receipt of the sum in the subsequent FY not being premium which (a) has been claimed as deduction under any other provision of the IT Act; or (b) is included while computing income in earlier years.
     
• Rule 11UACA of the IT Rules shall come into force from 16 August 2023.

Circular:

• Consideration⁴ received during the FY under an eligible LIP⁵ shall be exempted or not exempted under section 10(10D) of the IT Act, subject to the satisfaction of other provisions of said clause. The same are explained below by way of examples of different situations:

Situation 1

No consideration is received by the taxpayer on any eligible LIP during any FY preceding the current FY⁶ or consideration has been received on such eligible LIPs but has not been claimed exempt. The exemption under section 10(10D) of the IT Act shall be determined as under:

Sr. No.	Consideration received during the current FY from	Amount of premium payable on such LIP/LIPs during its term	Consideration eligible for exemption under section 10(10D) of the IT Act
i.	One eligible LIP	Less than INR 0.5mn for all FYs	Yes (subject to fulfilment of other conditions).
ii.		Exceeds INR 0.5mn for any of the FYs	No
iii.	More than one eligible LIPs	Aggregate of the amount on such eligible LIPs less than INR 0.5mn for all FYs	Yes (subject to fulfilment of other conditions).
iv.		Aggregate of the amount on such LIPs exceeds INR 0.5mn for any of the FYs	Yes. But only such eligible LIPs where an aggregate of the premium payable is less than INR 0.5mn for all FYs during their term (subject to fulfilment of other conditions). (Refer examples)

 

Situation 2

Consideration has been received by the taxpayer under any one or more eligible LIPs during any FY preceding the current FY and it has been claimed exempt under section 10(10D) of the IT Act. Such eligible LIPs are referred to as ‘old eligible LIPs’ in this paragraph and corresponding examples. Premium paid on such old eligible LIPs is to be considered while calculating the overall limit of INR 0.5mn.  

The above guidelines are explained with the help of the following examples. In examples 1 to 5, the taxpayer has policy/policies (as tabulated) satisfying all the conditions laid down in Section 10(10D) of the IT Act (other than the sixth and seventh proviso of clause 10D). Further, the taxpayer did not receive any consideration under any other eligible life insurance policy in earlier FYs preceding the FY 2033-34.

Example 1

Particulars	Eligible LIPs
	A	B
Date of issue	1 April 2013	1 April 2023
Annual Premium (INR)	0.6mn	0.6mn
Sum assured (INR)	6mn	6mn
Consideration received as on 1 November 2023 on maturity	7mn
Consideration received as on 1 November 2033 on maturity		7mn
Taxability	Exempt since LIP issued before 1 April 2023.	Not exempt, since the annual premium payable exceeded INR 0.5mn

In case the aggregate premium paid under LIP B is INR 4mn, then taxable income under section 56(2)(xiii) of the IT Act concerning the sum received upon maturity of LIP B will be 3mn (7mn reduced by 4mn).

Example 2

Particulars	Eligible LIPs
	A	B
Date of issue	1 April 2023	1 April 2023
Annual Premium (INR)	0.45mn	0.55mn
Sum assured (INR)	4.5mn	5.5mn
Consideration received as on 1 November 2033 on maturity	5.2mn	6mn

The consideration received shall be:

• In the case of LIP B- not exempt under section 10(10D) of the IT Act, since as per the seventh proviso, the aggregate of the annual premium payable for LIP “A” and LIP ‘B’ exceeds INR 0.5mn during the term of these policies.
• In the case of LIP A- exempt under section 10(10D) of the IT Act since its annual premium does not exceed INR 0.5mn in any of the FYs during the term of these two policies.

Example 3

Particulars	Eligible LIPs
	A	B	C
Date of issue	1 April 2023	1 April 2023	1 April 2023
Annual Premium (INR)	0.1mn	0.35mn	0.6mn
Sum assured (INR)	1mn	3.5mn	6mn
Consideration received as of 1 November 2033 on maturity	1.2mn	4mn	7mn

The consideration received shall be:

• In the case of LIP C- not exempt under section 10(10D) of the IT Act, since as per the seventh proviso, aggregate of the annual premium payable for LIP ‘A’, LIP ‘B’ and LIP ‘C’ exceeds INR 0.5mn during the term of these policies.
• In the case of LIP A and LIP B- exempt under section 10(10D) of the IT Act, since the aggregate annual premium for these two policies does not exceed INR 0.5mn in any of the FYs during the term of these two policies.

Example 4

LIPs	X	A	B	C
Date of issue	1 April 2022	1 April 2023	1 April 2023	1 April 2023
Annual Premium (INR)	0.5mn	0.1mn	0.35mn	0.6mn
Sum assured (INR)	5mn	1mn	3.5mn	6mn
Consideration received as on 1 November 2032 on maturity	6mn
Consideration received as on 1 November 2033 on maturity		1.2mn	4mn	7mn

The consideration received shall be:

• In the case of LIP X- exempt under section 10(10D) of the IT Act as the policy was issued before 1 April 2023 and it is not covered by recently introduced provisions.
• In the case of LIP C- not exempt under section 10(10D) of the IT Act, since as per the seventh proviso, aggregate of the annual premium payable for LIP “A”, LIP “B” and LIP “C” exceeds INR 0.5mn during the term of these policies.
• In the case of LIP A and LIP B- exempt under section 10(10D) of the IT Act since the aggregate of annual premium for these two policies does not exceed INR 0.5mn in any of the FYs during the term of these two policies.

Example 5

LIPs	X	A	B	C
Date of issue	1 April 2023	1 April 2024	1 April 2024	1 April 2024
Annual Premium (INR)	0.45mn	0.1mn	0.15mn	0.6mn
Sum assured (INR)	4.05mn	1mn	1.5mn	6mn
Consideration received as on 1 November 2033 on maturity	5mn
Consideration received as on 1 November 2034 on maturity		1.2mn	1.8mn	7mn

The consideration received shall be:

• In the case of LIP X- exempt for FY 2033-34 under section 10(10D) of the IT Act, since the annual premium does not exceed INR 0.5mn.
• In the case of LIP A, LIP B and LIP C- not exempt under section 10(10D) of the IT Act, since as per the seventh proviso, the aggregate of the annual premium payable for these three LIPs and LIP ‘X’ exceeds INR 0.5mn during the term of these policies. The consideration under LIP ‘A’ will also not be eligible for exemption under the said clause since the aggregate of the annual premium of LIP ‘X’ and ‘A’ exceeds INR 0.5mn.

Example 6

The taxpayer has the following policies all of which satisfy all the conditions laid down in Section 10(10D) of the IT Act (other than the sixth and seventh proviso of clause 10D). Further, the taxpayer did not receive any consideration under any other eligible life insurance policy in earlier FYs preceding the FY 2033-34.

LIPs	X	A	B	C
Date of issue	1 April 2023	1 April 2024	1 April 2024	1 April 2024
Annual Premium (INR)	0.25mn	0.2mn	0.25mn	0.6mn
Sum assured (INR)	2.5mn	2mn	2.5mn	6mn
Consideration received as on 1 November 2033 on maturity	3mn
Consideration received as on 1 November 2034 on maturity		2.4mn	3.8mn	7mn

The consideration received shall be:

• In the case of LIP X- exempt for FY 2033-34 under section 10(10D) of the IT Act since the annual premium does not exceed INR 0.5mn.
• In the case of LIP A, LIP B and LIP C- consideration received under LIP ‘B’ only will be exempt under section 10(10D) of the IT Act during the FY 2034-35 while consideration received under LIP ‘A’ and ‘C’ will be taxable as per the seventh proviso.
• The exemption is restricted to consideration under LIP ‘B’ since the aggregate of annual premiums payable for LIP ‘X’ and ‘B’ together did not exceed INR 0.5mn for any of the FYs during the term of these two policies.
• Aggregate of LIP ‘B’ and LIP ‘X’ i.e., INR 0.5mn is considered since it is more beneficial than the aggregate of LIP “A” and LIP ‘X’ i.e., INR 0.45mn.

In case LIP X had not been claimed exempt under section 10(10D) of the IT Act then, consideration received under LIP ‘B’ and LIP ‘C’ will be exempt under section 10(10D) of the IT Act. However, since the aggregate of the annual premium payable for the LIPs “B” and ‘C’ together did not exceed INR 0.5mn for any of the FYs during the term of these policies and LIP ‘X’ was not claimed to be exempt under section 10(10D) of the IT Act, the consideration received under LIP ‘A’ will be taxable as per the seventh proviso.  

Example 7

The taxpayer has the following policies all of which satisfy all the conditions laid down in Section 10(10D) of the IT Act (other than the sixth and seventh proviso of clause 10D). The taxpayer did not receive any consideration under any other eligible life insurance policy in earlier FYs preceding the FY 2035-36 other than under LIP ‘X’ and ‘Y’.

LIPs	X	Y	A	B	C
Date of issue	1 April 2023	1 April 2023	1 April 2024	1 April 2024	1 April 2024
Annual Premium (INR)	0.2mn	0.2mn	0.2mn	0.3mn	0.6mn
Sum assured (INR)	2mn	2mn	2mn	3mn	6mn
Consideration received as of 1 July 2033 on surrender	1.2mn
Consideration received as of 1 November 2034 on maturity		2.4mn
Consideration received as of 1 November 2035 on maturity			2.4mn	3.6mn	7mn

The consideration received shall be:

• In the case of LIP X and LIP Y- exempted under section 10(10D) of the IT Act since the annual premium does not exceed INR 0.5mn during the term of these policies.
• In the case of LIP A, LIP B and LIP C- taxable under section 10(10D) of the IT Act since as per the seventh proviso, the aggregate of the annual premium payable for the LIP ‘X’ and ‘Y’ for the FY 2023-24 to 2033-34 was INR 0.4mn. If the annual premium of LIPs ‘A’ or ‘B’ or ‘C’ is added then the aggregate of the premium will exceed INR 0.5mn for the FY 2024-25 to 2033-34.
• As per the seventh proviso, in case of multiple LIPs, the aggregate of the premium payable for all the policies that are claimed to be exempt under section 10(10D) of the IT Act shall not exceed INR 0.5mn during the term of any of those policies.

Example 8

If in example 7, the taxpayer does not claim exemption concerning the surrender value of LIP ‘X’, then consideration received:

• In the case of LIP Y- will be exempt for the FY 2034-35
• In the case of LIP B- will be exempt for the FY 2035-36 under section 10(10D) of the IT Act. The exemption is restricted to LIP “B” since the aggregate of the annual premium payable for LIP ‘Y’ and ‘B’ together did not exceed INR 0.5mn for any of the FYs during the term of these policies and the taxpayer did not claim LIP ‘X’ as exempt.
• LIP ‘B’ is preferred in place of LIP ‘A’ as it is more beneficial to the taxpayer.

Example 9

The taxpayer has the following LIPs and ULIPs all of which satisfy all the conditions laid down in Section 10(10D) of the IT Act (other than the fourth, fifth, sixth and seventh proviso of clause 10D). The taxpayer did not receive any consideration under any other eligible LIPs or ULIPs in earlier FYs preceding the FY 2033-34 other than under ULIP ‘X’ and LIP ‘A’.

LIP			A	B	C
ULIP	X	Y
Date of issue	1 April 2021	1 April 2023	1 April 2023	1 April 2023	1 April 2024
Annual Premium (INR)	0.1mn	0.1mn	0.1mn	0.15mn	0.3mn
Sum assured (INR)	1mn	1mn	1mn	1.5mn	3mn
Consideration received as on 1 July 2033 on surrender	0.6mn		0.6mn
Consideration received as on 1 November 2034 on maturity		1.2mn		1.8mn	3.4mn

The consideration received shall be:

• In the case of ULIP X and ULIP Y- exempted under section 10(10D) of the IT Act since the annual premium does not exceed INR 0.25mn during the term of these policies.
• In case of LIP A- exempt under section 10(10D) of the IT Act during FY 2033-34 and will become old eligible LIP for which exemption has been claimed.
• In case of LIP C- exempt under section 10(10D) of the IT Act during FY 2034-35 as the sum of premium of LIP ‘A’ and LIP ‘C’ does not exceed INR 0.5mn in any of the FYs during the term of these policies.    
• In case of LIP B- not exempt since the sum of premium of LIP ‘A’, ‘B’ and ‘C’ exceeds INR 0.5mn during the term of these policies.
• LIP ‘C’ is preferred in place of LIP ‘B’ as it is more beneficial to the taxpayer.  

• Clarification on GST component

The premium payable/aggregate premium payable for LIP(s), other than a ULIP, issued on or after 1 April 2023, for any FY, shall be exclusive of the Goods and Service Tax amount payable on such premium.

• Clarity on the premium of Term LIP⁷

• The provision of the sixth and seventh proviso of Section 10(10D) of the IT Act shall not be applicable in case any sum is received under a Term LIP. It shall continue to be exempt under section 10(10D) of the IT Act, irrespective of the premium amount payable in respect of such policy. 
• The premium paid for such policies shall not be counted for checking INR 0.5mn limit for the purposes of the sixth and seventh proviso.

BDO India comments:

This is a welcome move by CBDT as the circular provides much-needed clarity to taxpayers by providing situations and examples of different instances on computing consideration eligible for exemption. Further, Rule 11UACA of the IT Rules provides that any surplus amount received upon maturity of such LIPs would be taxed is ‘'income from other sources’.