Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether Installment Received Of Money Back Policy Is Liable To Tax?

QUERY: Mr. X has purchased single premium money back plan of LIC; called New Bima Bachat Policy. Sum assured is Rs. 7,00,000/-. He has paid a single premium of Rs. 5,59,843/-. He will be getting Rs. 1,05,000/- as survival bonus after every three years from LIC during the span of 15 years and there after the sum assured with Bonus on maturity.

The survival bonus and sum assured with bonus, receivable during the life time of Mr. X, is taxable in his hands as there is no exemption available as per the provisions of section 10 (10D) of the Income tax Act. There will be TDS also on this amount. Mr. X has not claimed deduction under section 80C on this premium paid, which in any case would have been Rs. 70,000/- only.

In this connection, the following questions arise:

1. Is there any specific provision under the Income tax Act by which this amount is taxed under the head “Income from other sources”?

2. Is it possible to show the income under head Capital Gain?

3. Is there any provision to claim the investment made in the policy as cost against the survival benefits?

4. If yes then how the same is to be claimed i.e. can one claim the cost by dividing it against the survival benefit receivable after every three years and then pay tax on entire amount received on maturity.


5. If the investment made is not allowed to be deducted from the survival amount receivable, will it not be unconstitutional as this will amount to taxing gross receipt and not income.
ANSWER: From the facts, it is clear that Mr. X has taken money back insurance policy called as New Bima Bachat Policy. As per the terms of the said policy, it is a single premium payment policy, where sum assured will be paid back to the policy holder in the form of survival benefit periodically. First survival benefit will be given to the policy holder on completion of three years of the policy and thereafter completing every three years. At the end of the term, policyholder on maturity will receive a sum assured minus survival benefits paid plus bonus. If he dies within the term of policy, death benefit will be paid to his nominee i.e. sum assured plus bonus.

As stated correctly, Mr. X is only entitled to claim deduction at Rs. 70,000/- as per section 80C(3A) read with section 80C(2), though he has paid premium of Rs. 5,59,843/- However, as stated he has not claimed any deduction under section 80C.

The amount receivable on maturity of the said policy would not be entitled to the benefit of section 10(10D) of the Act, amounting to Rs. 1,75,000/- plus bonus (i.e. sum assured Rs. 7,00,000/- less survival benefits paid in five installment of Rs. 1,05,000/-. i.e. Rs. 5,25,000/-)

So, the survival benefits received would be nothing but return of capital as it is money back policy, hence, the same is not liable to tax when it is received. But on maturity bonus amount would be taxable in the hands of Mr. X under section 56 of the Act as it cannot be taxed under any other head.

In view of the above, the queries raised in serial nos. 2 to 4 do not require any elaboration.

Further, there is nothing unconstitutional, as survival benefit is nothing but return of investment and on maturity bonus would be taxable as the same is not exempt under section 10(10D) of the Act.

As regards TDS deducted on each payment of survival benefit, can be claimed as a refund.
EXPERT:
SECTION(S): , , ,
GENRE:
CATCH WORDS: , , , , ,

One comment on “Whether Installment Received Of Money Back Policy Is Liable To Tax?
  1. Rajeeb says:

    Dear Mr. Motiwalla,

    Thanks for a clear explanation of the provision in regard to taxability of Survival benefits under LIC.

    May I request you to throw some light on how to disclose this in ITR? Secondly, is it right on part of LIC to show the whole proceeds paid instead of only the income from the policy in 26 AS?

Leave a Reply

Your email address will not be published.

*

Credit: Several of the queries and answers are reproduced with permission from the AIFTP Journal. We thank AIFTP for generously allowing us to host their research material.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org