Insurance and the direct tax code (DTC)

The DTC, which will become effective from April1, 2012 has a number of implications for the insurance sector – both life and non life. Here’s a look at the proposals that will affect policy holders and companies.

Implications for policy holders

Deductions under Section 80C: Presently deductions under section 80C are available up to Rs one lakh for various investment instruments including premium paid for life insurance, provident fund etc. Under the DTC only sums paid to towards a contract for an annuity plan of any insurer (subject to it being an approved plan) is eligible for a deduction of up to an aggregate limit of Rs one lakh (along with other approved funds).

Deduction of LIC premiums:

It is also proposed that premiums paid to LIC should be included in the additional deduction of Rs 50,000 which is currently available to other payments such as health insurance ad education of children. An important condition, however, is that only those insurance policies where the premium does not exceed 5 per cent of the capital sum assured in any year during the term of the policy would be eligible for this deduction.

Tax free investments: As the EEE (Exempt-Exempt- Exempt ) system of taxation (i.e. contributions are tax free, accretions are tax free and withdrawals are also tae free) will continue long term savings such as contributions to provident funds, approved superannuation funds, life insurance, gratuity fund etc will continue be tax free.

Tax on maturity proceeds: DTC provides that proceeds on maturity of life insurance policies (in cases other than the death of the policyholder) will be taxable in the policyholder’s ands. The exception however, is n the case of policies where the premium paid does not exceed 5 per cent of the sum assured or the insurer has paid distribution tax. In such cases the life insurance company would have to withhold tax at specified rates from these proceeds being paid to policy holders. N the case the policy holder is an individual or has HUF status the tax withheld will be at the rate of 10 per cent in the case of any other deductee, Implications for companies, Life insurances companies.

Higher corporate tax

Presently life insurance companies are subject to a concessional tax rate of 12.5 per cent (plus surcharge and education cess) on the surplus disclosed by the actuarial valuation as per the insurance act, 1938 less the opening surplus disclosed by that valuation. Now DTC proposes to do away with this taxation scheme an proposes to tax the profits in the shareholders account at the normal corporate tax rate of 30 per cent leaving policyholders funds to be taxed in the hands of shareholders.

Distribution tax

In addition to corporate tax, insurers will have to pay a 5 per cent distribution tax on the income distributed or paid to policy holders in case of approved equity oriented life insurance schemes .These are life insurance schemes were more than 65 per cent of the total premiums received are invested in equity shares of domestic companies.

General Insurance Company

Other provisions which Impact the insurance sector

Any insurance premium including re-insurance premiums accrued from or payable by any resident or non-resident in respect of insurance covering any risk in India, is deemed to accrue or arise in India and is subject t tax in India. Such payments are subject to with holding tax at the rate of 20 percent on a gross basis, without any deduction for expenses.

Apart fro the above change the definition of permanent establishment has been expanded to include the person acting in India on behalf of a non resident engaged in the business of insurance through which the non resident collects premiums in India / insures risk situated in India. However if a tax treaty provides a definition narrower than what has been prescribed under the DTC, then that definition would apply.

Under the DTC, an important departure from the present position is that a provision for loss in the diminution of the value of investments held should be allowed and unrealized gains on revaluation, if any on revaluation could become taxable, it routed through the Profit and loss Account statement.

MAT would be charged on both the companies at the rate of 20 percent.

  • Anonymous

    Hi Sir,

    Could you please elaborate the point “Deduction of LIC premiums: ” for “5 per cent of the capital sum assured in any year”