Note on Income Tax Rule 11UACA Notified on 16 August 2023

The Central Board of Direct Taxes (CBDT) vide notification no 61/2023/F. No. 370142/28/2023-TPL dated 16 August 2021, has notified Rule 11UACA of Income-tax Rules 1962 (the Rules) for computation of Income chargeable under Income from Other Sources per section 56(2)(xiii) of the Income-tax Act 1961 (the Act).

Background

• Finance Act 2023 inserted section 56(2)(xiii) of the Act relating to taxation of income from insurance policies (other than ULIP for which provisions already exists) having premium or aggregate of premium above Rs 5,00,000 in a year.
• This income shall be taxable under the head “Income from Other Sources”. Deduction shall be allowed for premium paid, if such premium has not been claimed as deduction earlier.
  Income will be exempt if received on the death of the insured person as per sixth proviso to section 10(10D) of the Act.
• These provisions are applicable for policies issued on or after 1st April, 2023.

Taxability of income from Life Insurance policies

The taxability of income from Life Insurance policies (other than ULIP) for policies issued on or after 01/04/2023 per section 10(10D) and section 56(2)(xiii) of the Act is as under.

*We have assumed all policies have been issued after 1.4.2012.

Notification and Rule 11UACA

Rule 11UACA provides method for computing income chargeable to tax under the head ‘ Income from other sources’ in respect of taxable non-ULIP policy. Based on the new Rule 11UACA, below is the income computation methodology for taxable non ULIPs :

1. Where sum is received for the first time under the life insurance policy during the previous year per Rule 11UACA:

2. Where sum is received under the life insurance policy during the subsequent previous years per Rule 11UACA:

3. Vide circular no 15 of 2023 dated 16 August 2023, has clarified that, the sum received under a life insurance policy apart from what has been mentioned in section10(10D), would exclude the following:

• Received under a unit linked insurance policy; or
• being the income referred to in section 56(2)(iv) of the Act.
• GST not to be included while calculating the threshold
• Term life insurance policy

Illustration

Below example related to whether exemption under section 10(10D) of the Act will be available or not as per sixth proviso to section 10(10D) of the Act and taxability under section 56(2)(iv) of the Act:

Example 1

Reasons:

• The consideration received under policy A will be exempt as the policy has been issued before 1.4.2023.
• The policy B will be exempt since aggregate annual premium does not exceeds Rs. 500,000.

Example 2

Reasons:

• The consideration received under policy A will be taxable since aggregate annual premium exceeds Rs. 500,000

Example 3

Reasons:

• The consideration received under policies A & B will be exempt since aggregate annual premium does not exceeds Rs. 500,000.

Example 4

Reasons:

• The consideration received under policy A will be exempt since aggregate annual premium does not exceeds Rs. 500,000.
• The policy B will be taxable since aggregate annual premium exceeds Rs. 500,000.

Example 5

Reasons:

• The consideration received under policy B will be exempt since aggregate annual premium does not exceeds Rs. 500,000.
• The policy A will be taxable since aggregate annual premium for policy A and B will exceeds Rs. 500,000.

Example 6

Reasons:

• The consideration received under policy A will be exempt as the policy has been issued before 1.4.2023.
• The consideration received under policy B and D will be exempt since aggregate annual premium does not exceeds Rs. 500,000.
• The consideration received under policy C and E will be taxable since aggregate annual premium for policies B,C, D & E will exceeds Rs. 500,000.

Example 7

1A. (Partial surrender of policy)

Reasons:

• The consideration received under policy A will be taxable since aggregate annual premium for policy exceeds Rs. 500,000. Further in the year of partial surrender, amount received will be taxable as Income from other sources as per Rule 11UACA of the Rules.

1B. Final surrender of policy/ maturity of policy

Reasons:

• The consideration received under policy A will be taxable since aggregate annual premium for policy exceeds Rs. 500,000. Further in the year of final surrender of policy, amount received will be taxable as Income from other sources as per Rule 11UACA of the Rules after excluding premium considered earlier.

Observation/Comment

The above Rule 11UACA notified for tax calculation on life insurance policy amounts under section 56(2)(xiii) of the Act will be applicable for any sum received on the maturity of a life insurance policy, other than a unit-linked insurance plan (ULIP), if the aggregate premium paid for any year exceeds Rs. 5 lakh, as ‘Income from Other Sources’.

The notification comes to effect from 16 August 2023 and is applicable for assessment year 2024-25.

Conclusion

The new provisions tax the receipt on maturity of endowment/money back plans of Insurance policies. However, this provisions should be beneficial to tax payers, as earlier they were only able to claim deduction of premium cost to the extent of Rs. 150,000 per section 80C of the Act, but now the tax payer in the year of receipt from life insurance policy should be able to claim the entire amount of premium paid over an above claimed under section 80C of the Act.

Why Choose InCorp?

Incorp’s Advisory and Taxation Team provides seamless support in respect of all tax related compliance and advisory services. Our clients range from listed companies to investors and we help them to create valuable investments.

FAQs

Share this post