The new guidelines would have been furnished by the Central Board of Direct Taxes (CBDT) on how the tax exempted maturity amount via the life insurance policy shall get computed in the fiscal year when the premium filed would be more than the particular level. Under the new rules, the maturity amount via the life insurance policies would purchase on or post 1st April 2023 shall not get exempted fully from tax.
After Budget 2023 changed the life insurance maturity amount to be taxed if the premium paid in a financial year exceeds Rs 5 lakh, these new rules have been implemented. Except for unit-linked insurance plans (ULIPs), all life insurance policies will be subject to these rules.
The income from ULIPs would be subject to tax starting on February 1, 2022, if the premium paid exceeds Rs 2.5 lakh in a fiscal year.
Through the circular and notification on 16th August 2023, the new CBDT guidelines would have been furnished through the circular as well as the notification.
What Does the CBDT Circular Specify?
As cited in the aforesaid paragraph the new CBDT rules shall get applied for the life insurance policies provided on or post 1st April 2023. Therefore for the policies of the life insurance that has been issued till 31st March 2023, the maturity proceeds shall be carried on to be exempted from tax whatever be the premium amount filed at the time of the policy term.
It is crucial to note that the maturity proceeds from the life insurance policy (issued on or before March 31, 2023) will not be taken into account in determining the tax-exempt amount in FY 2023–24 and subsequent financial years. Only policies issued on or after April 1, 2023, shall be taken into account for calculating the tax exemption on life insurance proceeds.
Under the circular of the CBDT which moves through the life insurance policy would get taxable when the same would meet the below-mentioned criteria-
- For one life insurance policy:- Money obtained via the life insurance policy shall get taxed when the premium filed in the former years at the time of the policy terms would be more than Rs 5 lakh.
- For distinct life insurance policies:- The money obtained via distinct life insurance policies shall get taxed when the aggregate premium filed in the former years at the time of the policy terms would be more than Rs 5 lakh.
When a person at the time of the policy term switches to the premium payment mode let’s say from the annual to semi-annual/ quarterly or vice-versa that directed to the premium filed would be more than Rs 5 lakh, the maturity proceeds of the life insurance policy shall get subjected to be taxed within the person.
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Please be aware that, regardless of the amount of premium paid, the aforementioned taxability restrictions will not apply in the event of the policyholder’s death. The amount that is taxable will be taxed as “Income from Other Sources.”
How to Determine the Tax-exempt Component of Life Insurance Plans
According to the CBDT recommendations, people may select any life insurance policy as long as the total premiums paid surpass Rs 5 lakh. Consequently, a person is permitted to pick life insurance plans with greater maturity yields for tax exemption and pay taxes on those with lower maturity amounts.
In the circular of the CBDT, it has furnished distinct examples for the way the tax exemption of the life insurance would proceeds would get computed when the premium filed in any of the former years at the time of the policy terms would be more than Rs 5 lakh. CBDT circular instance would have been furnished below-
| Life Insurance Policy | X | A | B | C |
|---|---|---|---|---|
| Date of issue | April 1, 2022 | April 1, 2023 | April 1, 2023 | April 1, 2023 |
| Annual premium (Rs) | 5 lakh | 1 lakh | 3.5 lakh | 6 lakh |
| Sum Insured (Rs) | 50 lakh | 10 lakh | 35 lakh | 60 lakh |
| Maturity amount received on Nov 1, 2032 | 60 lakh | – | – | – |
| Maturity amount received on Nov 1, 2033 | – | 12 lakh | 40 lakh | 70 lakh |
The life insurance policy X’s maturity proceeds are shown in the table above to be excluded because the policy was issued before April 1, 2023. On April 1, 2023, further life insurance policies were issued. The tax-exempt fraction will need to be calculated here by the person.
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A and B life insurance plans will have tax-free maturity proceeds. This is so because the combined yearly premium for both plans in a given financial year does not exceed Rs 5 lakh. Because the yearly premium exceeds Rs 5 lakh, C’s life insurance policy’s maturity profits will be taxed.
| Life Insurance Policy | X | A | B | C |
|---|---|---|---|---|
| Date of issue | April 1, 2023 | April 1, 2024 | April 1, 2024 | April 1, 2024 |
| Annual premium (Rs) | 4.5 lakh | 1 lakh | 1.5 lakh | 6 lakh |
| Sum Insured (Rs) | 40.5 lakh | 10 lakh | 15 lakh | 60 lakh |
| Maturity amount received on Nov 1, 2033 | 50 lakh | |||
| Maturity amount received on Nov 1, 2034 | – | 12 lakh | 18 lakh | 70 lakh |
The maturity proceeds from X life insurance policy shall get exempted from tax in FY 2033-34. The same would be due to the yearly premium which does not get more than Rs 5 lakh. While the maturity proceeds shall get taxed for the left insurance policies (A, B, and C). It is due to the aggregate yearly premiums of all 4 policies that would be more than Rs 5 lakh at the time of the policy term FY 2023-24 and FY 2033-34.
The circular has also made it clear that the yearly premium would not be taken into account if Goods and Services Taxes (GST) has been paid. Term life insurance plans will not be subject to the new CBDT regulations on the taxability of life insurance proceeds. This is so that, in the event of the policyholder’s death, the money will go to the nominee and, if the policyholder lives the policy term, no money will be paid to the policyholder.
What is the Rate of Income Tax?
Under the income tax slab rates which are subjected to be applied on the income of the person, the maturity shall proceed.
