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Taxability amount in case of insurance policy maturity

CA Shailesh Urdhwareshe (Sr. Partner) (95 Points)

28 July 2016

My client had purchased a Life Insurance Policy in the August 2010 wherein he paid a lump sum premium of Rs. 354,000/- for a policy of Rs. 360,000/-(Sum Assured). This policy got matured in the financial year 2015-16 and the assessee received a sum of Rs. 484,000/- as maturity amount. As per recent provisions, Insurance company has deducted I Tax @ 2% on the total maturity.

Main querry is that while working out the taxable income ,what component is taxable ? is it the full amount received as maturity or it is the maturity amount less the premium already paid? what are the references ?

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3 Replies

Udgam Koomar (Tax Technologist) (1949 Points)
Replied 28 July 2016

Why will the principle be taxed, if atall its taxed.

CA Shailesh Urdhwareshe (Sr. Partner) (95 Points)
Replied 28 July 2016

It is nowhere clarified which part is taxable and which one not. TDS has been all full amount of matureity. it is getting reflected in 26 AS also. so if we consider only the difference, the income will not match wioth 26 AS. If I have to show gross, under which section will I claim the deduction of principal amount ?

CA Sridhar.K (Chartered Accountant ) (51 Points)
Replied 03 August 2016

Since, it is not clearly mentioned if it is ordinary insurance policy or unit linked insurance policy(ULIP) i am herewith providing my view if it is a ULIP.

Legal Background:

The words used in Section 10 sub-section 10D begins with "any Sum" so it has to be interpreted with inclusively all sums received, the clause (c) of the above said section reads as under:

"(c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 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"

Hence, all sums received under an insurance policy (sum assured+bonus+any other sum) will be exempt only if following conditions are satisfied:

(i) Insurance policies should be issued during 1st April, 2003 to 31st March, 2012. (This is satisfied in this case since it is issued in the year 2010)

(ii) Actual Insurance premium "payable" for any of the years during the policy should not exceed 20% of the Sum assured.

Facts of the Case:

Section 194DA contains that deduction of 2%(till 31st May, 2016) of the insurance sum received under a policy if the said sum received is not exempt U/s 10(1D).

Kindly refer the below link what the CEO of myinsuranceclub.com have to say about unit linked insurance plan.

https://www.sify.com/finance/quick-facts-about-section-10-10-d-of-the-income-tax-act-news-income-tax-obvkMPcgafbsi.H T M L

Keeping the actual scenario of the insurance apart, there is second way of treating the same for tax, that is a more clever route to put it across differently:

The units what is given by the insurance Company find place in Section 2(h) clause (ib) of Securities Contracts Regulation Act, 1956 as "units or any other instrument issued by any collective investment scheme to the investors in such schemes" and it can be interpreted to include the units as security which is a Capital Asset within the definition of Section 2(14) of the Income Tax Act, 1961.

Hence, it can also be considered as a capital gain tax it as a Long Term Capital Gain and indexation benefit is available since it is a LTCG.