The amount received would be exempt from tax if the policy meets certain conditions
I had purchased an insurance policy from ICICI, namely ICICI PRULITE II – RP, as per following details: Policy commencement date – September 30, 2016; Annual premium – ₹3 lakh; Premium payment term of five years; Policy term of 30 years. Due to financial exigencies, I opted for foreclosure of the policy, following regular payment of four annual premiums. Total premium paid was ₹12 lakh, paid on September 27, 2016, September 30, 2017, September 30, 2018 and September 30, 2019. I received the foreclosed amount of ₹14,08,603 on October 4, 2021. Kindly let me know the capital gains accrued on this transaction.
As per the provisions of Section 10 (10D) of the Income-tax Act 1961 (‘the Act’), any sum received under a life insurance policy, including the sum allocated by way of bonus other than the amount received under the circumstances below, is exempt from taxes:
• any sum received under sub-section (3) of section 80DD; or
• any sum received under a Keyman insurance policy; or
• Insurance policy issued on or after April 1, 2003, but before March 31, 2012, where the premium payable for any year during the term of the policy exceeds 20 per cent of the sum assured.
• Insurance policy issued on or after April 1, 2012, where the premium payable for any year during the term of the policy exceeds 10 per cent of the sum assured (provided where policy is issued after April 1, 2013, for life insurance of a person with severe disability under section 80U or disease or ailment under section 80DDB, 10 per cent shall be substituted by 15 per cent).
Further, Finance Act 2021, inserted a proviso to Section 10(10D) of the Act, wherein the above exemption would not be available for any Unit Linked Insurance Premium (ULIP) issued on or after February 1, 2021, where the premium payable for any year during the term of the policy exceeds ₹2.50 lakh. Since the policy being referred here was issued before February 1, 2021, the said proviso inserted by Finance Act 2021, would not be applicable.
Hence, in this case, since the policy was issued after April 1, 2012, in case the premium paid the term of the policy does not exceed 10 per cent of the sum assured, the amount received on foreclosure of the policy would be exempt from tax.
The writer is a practising chartered accountant
Published on May 28, 2022