An asset that can’t be taken away

A life insurance policy doesn’t just provide the comfort of a life cover. It also offers benefits aplenty under various Acts – the Income Tax Act and Wealth Tax Act, to name a few. Here’s more.

One key benefit of a life insurance policy is that under Section 60(1)(kb) of the Code of Civil Procedure, 1908, the amount payable under a policy on the life of a debtor under prosecution is exempt from attachment and sale by any agency. This benefit is available irrespective of whether the policy matures during the lifetime of the debtor in question or the amount is payable after his death.

Next, companies often take out a ‘Keyman insurance policy’ on the life of one or more key employees who are, or have been, connected with it.

In such cases, the company pays the premium and may often also be the beneficiary. Such a policy can also be assigned by the company to another person during the term of the policy, with or without a consideration. These variations fall within the ambit of ‘Keyman insurance policy’. Amounts received under a Keyman insurance policy are not exempt from income tax. If a policyholder carrying on any business or profession is also the beneficiary of the policy, the sums received by the policyholder will be taxable as profits from a business or profession.

If the beneficiary is an employee (or former employee), the amount received will be taxable as “profits in lieu of salary”. In case of any other beneficiary not falling in any of the above categories, the amount received will be taxable as “Income from Other Sources”.

Here’s a more well-known benefit. You know that premiums paid fall under Section 80C deductions.

But this apart, the amount paid on the death of the insured to his or her heirs does not constitute taxable income and, like any other asset passing on the death of an individual to the heirs, is not subject to income tax.

Similarly, any sum received by a beneficiary under a policy, including bonus, whether during the term of the policy, or upon surrender or maturity, is exempt from income tax.

But this is allowed provided the premium for any of the years does not exceed 20 per cent of the actual capital sum assured (10 per cent if they have been issued after March 31, 2012).

Even if you do exceed these limits, you can still claim that income tax can be charged only on the net amount after deducting the premium paid from the amount received.

Next, irrespective of these limits, the value of a life insurance policy is not regarded as an “asset” under the Wealth Tax Act. They are, therefore, not taken into account for purposes of computing your taxable net wealth.

Exemptions and benefits are not confined to policies issued by Indian insurance companies either. Therefore, unless there is a change in the law, life policies issued by foreign insurers would also qualify for tax benefits.

This is of relevance particularly for high net worth individuals, since foreign insurance companies often offer more attractive investment products than the ones available at home. The premium can be remitted from India. One of the permitted transactions under the scheme is the “taking out of insurance policy by a person resident in India from an insurance company outside India”.

Therefore, individual residents in India can remit funds under the scheme toward the purchase of a foreign life insurance policy up to a limit of $75,000 through a bank or authorised dealer without the need for prior permission from the RBI. But do note that the current foreign exchange rules require the maturity proceeds to be remitted to India within seven days of receipt.

The author is a senior partner of Associated Law Advisers.