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LIC policies: are all amounts received taxable?

QUESTION: I would like to inform you that Life Insurance Corporation of India introduced a modified version of existing Jeevan Dhara plan known as New Jeevan Dhara. New Jeevan Dhara is actually a deferred annuity plan and the annuitant will get a guaranteed pension from the vesting date onwards. The annuity received is treated as taxable income.

They have given an option to the annuitant to take the maturity value in one lumpsum provided the deferment period is ten years or more. This option is to be exercised by the annuitant before six months from the date of maturity not earlier than 12 months from maturity. If the annuitant opts for the lumpsum payment, is it taxable income?

Also please let us know how the premium paid for New Jeevan Dhara policy, the annuity given to the annuitant and the lumpsum given to the nominee on death of the annuitant are treated under income tax? Usually we are being told that any amount received from LIC of India by way of maturity benefit or death claim is not taxable except annuities.

ANSWER: Jeevan Dhara policies had earlier been covered by Section 80CCA and the premium had therefore been allowed as a deduction. But this policy had to be discontinued when the deduction under Sec. 80CCA was withdrawn as regards amount deposited or paid on or after April 1, 1992, as it happened for National Savings Scheme, 1987. Since it was then allowed as deduction from income, the premium towards this policy was not entitled for tax rebate under Sec. 88. The proceeds of this policy, known as deferred annuity plan, whether received as an annuity or on surrender value or bonus or otherwise was taxable under the terms of deduction itself under Sec. 80CCA(2).

When the deduction under Sec. 80CCA was withdrawn, it would have been better that the policy as well as NSS 1987 had been discontinued or described by a different name so as to avoid the confusion, which the taxpayers generally have in this regard.

The New Jeevan Dhara Policy is also a policy under the same deferred annuity plan and should have been notified under Sec. 88. Though outright deduction is no longer available, but probably because of lack of attention on the part of the LIC, which should have moved for such notification or because of an omission on the part of the Government, there appears to be an anomaly in that the payment of premium under this policy is not eligible for tax rebate under Sec. 88, unless one understands that though it is not notified under Sec. 88(2)(xiiia), it falls under Sec. 88(2)(ii), which allows tax rebate on premium paid under "a contract for deferred annuity (not being an annuity plan referred to in clause (xiiia) on the life of persons specified in sub-section (4), provided that such contract does not contain a provision for the exercise by the insured of option to receive cash payment in lieu of the payment of annuity". But then this policy has an option for lumpsum payment after ten years so that only policies for period of less than ten years, which do not contain the option clause, would qualify for tax rebate under Sec. 88 (2)(ii) of the Act.

As for the amount received from LIC, what is exempt under Sec. 10(10A) is "any sum received under life insurance policy including the sum allocated by way of bonus on such policy other than the policy covered by Sec. 80DDA(3)". Sec. 80DDA allowed deduction to guardians of handicapped dependents is no longer available after April 1, 1994.

It may, therefore, be seen that only the amount received against life insurance policy will be exempt and not annuity policies, whether the amount paid as premium for them is tax rebated or not. Life insurance policy has not been defined. Since insurance business is taxed under the First Schedule with reference to the Insurance Act, 1938 or any provision thereof, it would be reasonable to be guided by the definition of life insurance under Sec. 2(17), which incidentally includes definition of contract of insurance for human life, the relevant extract being reproduced below:

"Life insurance business means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include: (a) ......, (b) the granting of annuities upon human life, and (c) ......".

Sec. 4 of the Insurance Act also contemplates annuity policy as life insurance policy, as long as life risk is also covered, because even payment of annuity is only in the category of survival benefit, so that the normal inference that annuity has income character and is taxable should not be applicable. They may get exempted under Sec. 10(10D) as "any sum received under a life insurance policy" as long as it covers life risks, though it also has character of deferred annuity policy.

It is in this context, that whatever be the treatment of annuity amount, which should ordinarily be taxable, lumpsum amount under New Jeevan Dhara Policy by exercise of right of option or on death should be exempt under Sec. 10(10D).

But not all the policies issued by the LIC are life policies. Even if it is policy issued by LIC, the following are treated only as annuity policies taxable under different provisions of income-tax law:

"(1) Annuities purchased by approved superannuation funds (Refer The Fourth Schedule of the IT Act as well as Sec. 10(13) of the IT Act).

(2) Annuities and surrender value received under Jeevan Dhara (old) T.96 and annuities under Jeevan Akshay (Old) T.97 if IT concessions have been availed by the assessees as per Sec. 80CCA of the IT Act.

(3) Annuities and surrender value received under Jeevan Suraksha (T.122) policies of LIC if IT concessions have been availed by the assessee as per Sec. 80CCC(1).

(4) Annuities received under annuity certain policies issued without any bearing on human life (Table 60 & 61)".

It may therefore be generalised that other than the amount received under the above policies from LIC, all other amounts should not be taxable.

Tax Forum is obliged to Mr. B. Ramarao of Chennai (Life Insurance Consultant) for the assistance given in the clarification in connection with queries received not only from the readers but agents of LIC.

The law set out above should cover various policies issued not only by LIC but now after privatisation all life policies by any insurer.

Tax treatment to be given to the premia paid and the amount received either as annuity or surrender value or maturity are matters which should be capable of precise understanding and even assurance by the insurer and explanation by the agents. It is unfortunate that such clarity is lacking.

To answer, the specific query raised by the reader, premium paid under the new Jeevandhara policy will not be eligible either for deduction or for tax rebate, unless it happens to be a policy for a period less than ten years.

As for the amount received, since it is a policy where the risk to life is also covered, the annuity and the lumpsum received should not be taxable. Even annuity should not be taxable, where the policy is for ten years or more, since life is covered and it is not liable to tax falling under any of the four listed annuities received from LIC or even from other private insurers, if they issue similar policies because of Sec. 10(10D) of the Act.

It is again to be reiterated that it is necessary to have authentic clarification of the doubt by the insurers after consulting the Central Board of Direct Taxes in respect of each new kind of policies in the interest of not only the policyholders but to facilitate the tax collectors, who are in greater confusion on this issue than others connected with this business. Probably the Insurance Regulatory Authority of India can take steps in this regard.

S. Rajaratnam

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