Tuesday, September 27, 2016

Life Insurance Policy as Investment.

As written in previous post I never invested in Life Insurance till 2011. While looking for various options to save Income Tax in Feb 2011 I checked Single Premium Insurance Policy of ICICI Prudential. I had Rs 5 Lacs to invest so I bought one Single Premium Policy opting for 125% of Premium as Sum Assured i.e. Rs 6.25Lacs. I could have opted upto 500% of Premium as Sum Assured but I wanted to use this Policy as Investment and also got Income Tax Rebate on Rs 1 Lac.

This Policy had invested my money in very good funds and the Value during 4th year crossed Rs 6.25 Lacs when it became exactly like a Mutual Fund since there were no charges for insurance on it.

Recently I decided to surrender this Policy and got Rs 8.67 Lacs.

Since the Premium was more than 20% of Sum Assured I could not get the benefit of Section 10 (10D) of Income Tax Act and the amount of Rs 8.67 Lacs is taxable. Some so called good CAs advised me that the entire amount Rs 8.67 Lacs would be added to Taxable income and I should deposit advance tax. After searching on Internet I found articles on sites like Economic Times also saying that entire proceeds are taxable.

During my service with NTPC I had done a Departmental Inquiry and was familiar with the word Natural Justice. I believed that taxing entire Rs 8.67 Lacs which included Rs 5 Lacs Premium on which Tax was already paid was against Natural Justice. Moreover I always file my Income Tax Return without the help on any CA or TRP and maintain my books of account using Gnucash.

I decided to become offensive and told the CAs that I would file the Return treating this income under Capital Gain and fight a case but somehow thought that I could show Rs 3.67 Lacs as Income from Other Sources and be on safe side.

After digging and digging in Income Tax Act I found Circular No 7/2003 and why I selected the year 2003 to search because till then the Maturity/Surrender proceeds of any Life Insurance Policy (including Single Premium) was exempt under Section 10 (10D).

Para 10 of this Circular reads as follows:
10. Restriction of tax benefits in respect of certain insurance policies having premium of more than twenty per cent of the actual capital sum assured
10.1 Under the existing provisions contained in clause (10D) of section 10, any sum received under a life insurance policy including the sum allocated by way of bonus on such policy, (other than any sum received under a policy for the medical treatment, training and rehabilitation of a handicapped dependent under section 80DDA or any sum received under a keyman insurance policy), is tax-exempt.
10.2 Under the existing provisions of section 88, a deduction from the income-tax payable is allowed to an individual or a Hindu undivided family (HUF), in respect of any sums paid or deposited in PPF, GPF, NSC, insurance premia, etc. The deduction is allowed at specified percentage of such sums.
10.3 The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.
10.4 For the same reasons, a new sub-section (2A) has been inserted in section 88 which provides that the deduction in respect of the sums paid or deposited as premium under an insurance policy shall be available only on so much of any premium or other payment made on an insurance policy other than a contract for a deferred annuity as is not in excess of twenty per cent of the actual sum assured.
10.5 It has also been clarified in both the sections that the value of any premiums agreed to be returned or any benefit by way of bonus or otherwise, over and above the sum actually assured, which may be received under the policy by any person, shall not be taken into account for the purpose of calculating the actual capital sum assured.
10.6 These amendments will take effect from 1st April, 2004 and will, accordingly, apply in relation to the assessment year 2004-05 and subsequent years.
You can just read the sentence which has Bold Letters. The Income is only Rs 3.67 Lacs in my case.


I have spent most of my Career at Thermal Power Stations and was suffering with COPD. Therefore while at Jharsuguda in same situation I took another insurance policy in which I had to pay Rs 2 Lacs as premium for 5 years in which the Sum Assured was Rs 14 Lacs. The two Policies covered me for Rs 20 Lacs.

Today I don't need any insurance cover and surrendered this policy also which gave me Rs 10.85 Lacs on Rs 2 Lacs Premium paid for 5 years. The surrender proceeds of this Policy are exempt under Section 10 (10D). I could have kept this Policy till maturity after another 5 years but at my age the Mortality Charges being recovered from Rs 10.85 Lacs would have washed out big chunk of the value due to rise in NAV.

So much for Life Insurance Policy as investment.

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