INTRODUCTION
Proceeds from life insurance policies (LIPs) have caught attention of the law makers in recent years. The Finance Act, 2016 amended section 194DA to increase the rate of TDS to 2% and the Finance Act, 2019 made it 5% of the “income comprised” in the life insurance policy proceeds. This started a discussion on how income from a life insurance policy could be computed and under which head of income.
Two years later the Finance Act, 2021 inserted sub-section (1B) in section 45 giving capital gains characterization for the income from Unit Linked Insurance Policies (ULIPs) and Rule 8AD was inserted.
Three years later the Finance Act, 2023 has inserted clause (xiii) in section 56(2) providing taxation of income from life insurance policies not qualifying for the benefit of section 10(10D). This article summarises some of the issues related to the taxation of proceeds from life insurance policies.
WHAT IS A LIFE INSURANCE POLICY?
Life insurance companies issue several types of policies such as pension policies, annuity plans, health policies, group policies etc. Considering the types and varieties of policies issued by the insurance companies, it would be important to first determine whether the policy qualifies as a “life insurance policy” and then apply the relevant provisions.
The provisions dealing with life insurance policy under the Act are section 10(10D), section 194DA, section
