On August 16, 2023, the Central Board of Direct Taxes (CBDT) released new instructions within Circular No. 15 of 2023 pertaining to clause (10D) of Section 10 within the Income Tax Act of 1961. This specific clause deals with the provision of income tax exemption for amounts received from a life insurance policy, encompassing bonuses allocated to said policy. Nevertheless, this exemption is subject to certain exceptions.
The circular has been issued subsequent to the amendments in Finance Act 2023 which notified the tax exemption on any amount received from the life insurance policy.
Amendments in Finance Act 2023
The Finance Act, 2023 (Finance Act), inter-alia, amended clause (10D) of Section 10 of the Act by substituting the existing sixth proviso with the new sixth, seventh and eighth provisos to, inter-alia, provide that:
The ninth provision within clause (1OD) of section 10 within the Income Tax Act grants authority to the Central Board of Direct Taxes (CBDT) to formulate guidelines, subject to prior clearance from the Central Government.
These guidelines are aimed at addressing any challenges that may emerge during the implementation of the provisions outlined in the mentioned clause. In accordance with the authority conferred by this provision, the CBDT, with the pre-approval of the Central Government, is now presenting the subsequent guidelines.
Consideration received during the previous year under an eligible life insurance policy shall be exempted or not exempted under clause (10D) of section 10 of the Income Tax Act, subject to the satisfaction of other provisions of said clause. The same are explained by way of examples of different situations mentioned below with detailed examples in the circular.
Situation 1: No consideration is received by the assessee on any eligible life insurance policies during any previous year preceding the current previous year or consideration has been received on such eligible life insurance policies but has not been claimed exempt.
Situation 2: Consideration has been received by the assessee under anyone or more eligible life insurance policies during any previous year preceding the current previous year and it has been claimed exempt under clause (10D) of Section 10 of the Income Tax Act. Such eligible life insurance policies are referred to as “old eligible life insurance policies” in this paragraph and corresponding examples and reference to eligible life insurance policies in this paragraph and corresponding examples shall not include old eligible life insurance policies.
As per the guidelines:
(i) “eligible life insurance policy” means any life insurance policy (other than unit linked insurance policy) issued on or after 0 1.04.2023;
(ii) “consideration” means sum received (of any nature including bonus) under an eligible life insurance policy
(iii)”current previous year” means the previous year in which consideration is received and its taxability is being examined.
The CBDT also clarified that the provision of the sixth and seventh proviso of clause (10D) of Section 10 shall not be applicable in case of a term life insurance policy i.e. where sum under a life insurance policy is only paid to the nominee in case of the death of the person insured during the term of the policy and no amount is paid to anyone if the insured person survives the policy tenure.
Hence, any sum received under a term insurance policy shall continue to be exempted under clause (10D) of Section 10 of the Income Tax Act, irrespective of the amount of the premium payable in respect of such policy. Further, the premium paid for such policies shall not be counted for checking Rs 5,00,000 limit for the purposes of sixth and seventh proviso.
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