The government will levy tax on income from insurance policies having premium of more than Rs 5 lakh annually.
This tax will be levied on policies issued on or after April 1, 2023, Finance Minister Nirmala Sitharaman announced in the Budget 2023-24.
"It has been observed that several high-net-worth individuals are misusing the exemption provided under Section 10(10D) of Income Tax Act by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies," the explanatory memorandum on Finance Bill's provisions, said.
Section 10 (10D) of the income tax Act provides for income tax exemption on the sum received under a life insurance policy, including bonus, on such policy.
Basically income from traditional life insurance policies, other than unit-linked policies, having premium or aggregate of premium above Rs 5,00,000 in a year will be taxed.
"This income shall be taxable under the head 'income from other sources'. Deduction shall be allowed for premium paid, if such premium has not been claimed as deduction earlier," the memorandum said.
However, if the income is accrued due to the death of the insured person, then it will be exempted from taxation, the provision said.