India | Tax | Recent updates

25 August 2023

[Global Mobility Tax]

India | Tax | Recent updates

Impact High

Summary

Exemption for proceeds received under a life insurance policy.

The Indian taxation laws provide exemption in respect of proceeds received under a life insurance policy, including the sum allocated by way of bonus on such policy, subject to certain exclusions. In the Finance Act 2023 further restrictions were introduced in respect of life insurance policy [other than unit linked insurance policy (‘ULIP’) or term life insurance policy] issued on or after 1 April 2023 as below:

• Any sum received under one life insurance policy if the premium payable [excluding Goods and Service Tax (GST)] in any of the previous years during the term of such policy exceeds INR 0.5 million.
• Any sum received under more than one life insurance policy if the premium payable (excluding GST) in aggregate exceeds INR 0.5 million for any of the previous year during the term of any of such policies.

However, no restriction shall apply in case of any sum received under one or more life insurance policies on the death of the taxpayer.

In order to provide clarity on this new amendment and guidance on implementing the same, the Central Board of Direct Taxes (“CBDT”) has now issued a Circular1 providing different scenarios and examples for computing the exemption.

The CBDT also introduces a new rule outlining the method for calculating the amount of taxable income for cases where the above exemption is not claimed or allowed to the taxpayer.

Amendment in perquisite valuation rule of Rent-Free Accommodation (RFA)

The CBDT has notified lower rates of valuation i.e., 10%, 7.5% or 5% of salary as against the earlier rates of 15%, 10% or 7.5% of salary, respectively for RFA provided by private sector employers to its employees. These percentages are linked to revised population threshold of cities in which the accommodation has been provided. It has also introduced capping of the RFA valuation based on the cost inflation index (‘CII’) in cases where the employee stays in employer owned RFA for more than a year. This is effective from 1 September 2023 onwards.

Correction in the Tax payment challan

Presently, the rectification of any error made while filling the challan for depositing of taxes is cumbersome and can only be addressed in coordination with the bank or the jurisdictional assessing officer. A new feature has been enabled to conduct such corrections directly by the taxpayer using one’s online account at tax filing poral with ease within the prescribed timeline.

The Detail

Exemption for proceeds received under a life insurance policy

Under the Indian taxation law, exemption in respect of proceeds received, including the sum allocated by way of bonus on such policy, is not allowed in respect of the life insurance policy where the premium payable for any of the years during the term of such policy exceeds –

• 20% of the capital sum assured (for policy issued on or after 1 April 2003 but on or before 31 March 2012)
• 10% of the capital sum assured (for policy issued on or after 1 April 2012).

The Finance Act, 2023 has introduced further restrictions in respect of claiming exemption of life insurance policy (other than ULIP or term life insurance policy), issued on or after 1 April 2023 as below:

1. Single policy: No exemption allowed if the premium payable for any of the previous years during the term of such policy exceeds INR 0.5 million.
2. More than one policies: No exemption allowed if the aggregate of premium payable for any of the previous years during the term of any of such policies exceeds INR 0.5 million
3. Sum received on the death of a person will continue to be fully exempt.

In case the exemption is not claimed, the consequent taxable income shall be taxable under the head “income from other sources”. However, deduction shall be allowed for premium paid if such premium has not been claimed as deduction earlier.

Examples of Circular no. 15 of 2023 are explained below:
(For ease of reference we have indicated the example serial number same as in the Circular)

Example 6

Example 7

Example 9

Example 10

Option 1 (taxpayer opts to claim exemption of Policy X)

Option 2* (taxpayer does not opt to claim exemption of Policy X)

*This option is tabulated basis the clarification provided by CBDT against Example 10 in the Circular.

New Rule introduced

A newly notified rule outlines the method for computing taxable income under the head ‘income from other sources. If an individual receives a sum from a life insurance policy, the taxable income under the mentioned clause is calculated as follows:

For the first previous year in which the sum is received for the first time under the policy, the taxable income is computed using the formula A – B:

A = the sum received during the first previous year

B = the aggregate of premiums paid during the policy’s term until the date of sum receipt in the first previous year, minus any premiums not claimed as deductions under Indian income tax

For subsequent previous years following the first year of sum receipt, the taxable income is calculated using the formula C – D:

C = the sum received under the life insurance policy during the subsequent previous year.

D = the aggregate of premiums paid during the policy’s term until the date of sum receipt in the subsequent previous year, excluding premiums claimed as deductions under other provisions of the Act or included in amounts ‘B’ or ‘D’ of this rule in any previous years

The above can be explained with the below example (illustrative only):

• Date of policy – 1 April 2024
• Annual premium – INR 1 million

Amendment in the Rule relating to valuation of RFA.

The Finance Act, 2023 introduced amendments to streamline the valuation mechanism for company owned accommodation provided by employer (other than Central Government or State Government employers) to employees. Now, the CBDT has revised the rule as below:

Further, if an employee consistently receives the same company owned accommodation for over a year, it has been notified now that the subsequent year valuation will not exceed the first year’s (defined as 2023-24 or the fiscal year in which the accommodation was provided, whichever is later) value adjusted using the CII. Accordingly, taxable value of RFA in the following year will be the lesser of.

• Value computed according to the valuation rule; or
• First year’s value adjusted by the CII.

Adjusted first year’s value = first year’s value * CII of the subsequent year / CII of the first year.

Notably the amendments to rules are effective from 1 September 2023. Hence, valuation before 1 September 2023 will continue based on the existing rules.

What this means

The CBDT clarifies the mechanism of computing the exemption in respect of amounts received as maturity proceeds or bonus from the life insurance policies. This provides the required clarity specially with detailed examples, helping individuals having high premium multiple policies in computing the amount of eligible exemption and amount taxable.

The rationalisation of rules in respect of valuation of RFA provided by the employer to employee comes as a respite as this brings down the taxable value of RFA in the wake of rising inflation. The linking of the valuation with the CII is a scientific way of valuation avoiding the requirements of rate rationalisation in future. This will help employees who are using employer owned accommodation for longer period as the taxable value will not exceed the first year’s valuation, adjusted with the CII. However, this seem to be currently limited to accommodations owned by employers. Extending this for employers’ rented accommodations shall bring the valuations of all types of RFA at par.

Enabling correction by taxpayers directly using their online login account at tax filing portal for any errors in tax payment challans is a welcome step from CBDT. It’s common for taxpayers at times to input wrong assessment year while filling the tax payment challans and face challenges in getting the same corrected. This will ease the process as they can apply the correction of challan online using their online portal within the prescribed timeline.

How we can help

1. Evaluation of the taxability of the proceeds under multiple insurance policies and help in optimising the tax exemption.
2. Conducting sessions for employees, HR, Tax or Finance teams to brief them about the changes in the taxability of proceeds from insurance policies and drafting FAQs, including guidance on new tax challan correction methodology.
3. Running perquisite calculations in respect of employer provided accommodation for withholding purposes.