No Income Tax on life insurance policies of 10 or more years, ICAI recommends Central govt

In its Pre-Budget Memoranda – 2021, the Institute of Chartered Accountants of India (ICAI) has recommended the Union government to make all life insurance policies with a policy term of 10 years or more exempt from tax. The Institute has suggested that the tax exemption on life insurance policies should now be provided based on the policy term and not the premium to sum assured ratio, which is being currently done.

At present, tax exemption under Section 10 (10D) is based on the premium to actual capital sum assured ratio. Because of this, life insurance policies with a higher premium due to age factor, occupational/lifestyle diseases etc. gets treated as taxable. And, policyholders who need insurance cover are denied tax relief due to higher premiums, ICAI noted.

To provide relief to such policyholders, the ICAI has suggested the government that the “tax exemption should not be linked based on premium to sum assured ratio.”

Instead, “all LIPs with policy term of 10 years or more should be exempt,” ICAI said.

ICAI added that tax exemption based on policy term will help in medium to long term investments.

Currently, any sum received under life insurance policies not exempt under section 10 (10D) are taxable. ICAI says that the deduction of only premium while computing the net income/loss after surrender/withdrawal of policy doesn’t take care of inflation resulting in higher taxability.

To solve this issue, ICAI suggests that life insurance policies should be treated as a capital asset falling within the definition of “property” under Section 2(4) of the Income Tax Act.

“Indexation benefit (for premiums paid) will take care of inflationary impact- resulting in parity with other capital assets,” the Institute said.

The ICAI has also suggested that insurance companies should be allowed to carry forward and set-off unabsorbed business losses for an indefinite period. Currently, there is a limit of 8 years for carry forward and set off of business losses. ICAI said that this limit is “not sufficient”.