How exemptions for insurance policies work
The Finance Act, 2023, amended section 10(10D) of the Income Tax (I-T) Act to remove the exemption available to sum received from a life insurance policy in case the aggregate premium for all policies issued on or after the 1 April exceeds ₹5 lakh. On 16 August, the Central Board of Direct Taxes issued a circular clarifying this. If premium is payable for more than one life insurance policy, issued on or after 1 April, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed ₹5 lakh for any of the previous years during the term of any of those policies.
For instance, Jayesh holds insurance policy A issued on 1 April and pays premium of ₹5 lakh for 10 years until 1 April 2032. Then he purchases insurance policy B on 1 April 2033 and pays premium of ₹5 lakh for another 10 years until 1 April 2042. On 1 April 2043, he receives ₹50 lakh from life insurance policy A on maturity and on 1 April 2046 he gets ₹60 lakh from insurance policy B on maturity. In this case, the consideration received from both the policies A and B shall be exempt as the aggregate of the annual premium payable for the life insurance policies A and B together did not exceed ₹5 lakh for any of the previous years during the term of the policies.
The above amendments are for life insurance policies other than a unit-linked insurance policy (ULIP). Let’s take the example of Rekha who holds the following life insurance policies and ULIPs (see graphic). The surrender value of ULIP X will be exempt under section 10 (10D) since the annual premium does not exceed ₹2.5 lakh during the term of the policy. Further, the consideration received under the life insurance policy A during the
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