The Institute of Chartered Accountants of India (ICAI) has suggested that Life Insurance Policies be treated as a capital asset. “It is suggested that Life insurance Policies be treated as a capital asset falling within the definition of “property” under section 2(14) of the (income Tax) Act. Indexation benefit (for premiums paid) will take care of inflationary impact – resulting in parity with other capital assets,” ICAI said in its Pre-Budget Memorandum, 2022.
Usually, maturity proceeds under life insurance policy are tax-free under Section 10(10D) of the Income Tax Act. However, there are certain situations where this exemption is not available. For example, this exemption is not available on maturity proceeds of unit-linked insurance policies (Ulips) with an annual premium above Rs 2.5 lakh.
ICAI argues that deduction of only premium while computing the net income or loss after surrender or withdrawal of policy doesn’t take care of inflation resulting in higher taxability. “A tax consolidation scheme may also be adopted in India. This would create a positive impact on business with significant reduction of compliance and litigation cost,” ICAI added.
It also added that exemption should not be linked based on premium to sum assured ratio. “Currently exemption under section 10(10D) is based on premium to actual capital sum assured ratio. This results in life insurance with higher premiums due to age factor, occupational / lifestyle diseases (blood pressure, diabetes, etc.), being treated as taxable. Policyholders in absolute need of insurance cover are denied tax relief due to higher premiums in such cases,” it said.
