The Union Budget 2003-04 witnessed a change in tax laws related to Single Premium Policy. HDFC Standard Life Insurance Company, one of the leading private insurers, gave us their views on how this will impact the insurance-seeker.

Vide a new sub-section 2A in section 88, the Finance Bill seeks to provide that the deduction in respect of sums paid or deposited as premium under an insurance policy shall be available only on so much of the premium as is not in excess of twenty per cent (20%) of the actual sum assured.

Interpretation: As per the proposed amendment, if the premium paid on an insurance policy is more than 20% of the sum assured for that policy, the amount in excess of 20% will not be eligible for deduction under section 88.

The proposed amendment will not apply to a contract for deferred annuity.

This amendment, if approved by Parliament, will come into force with effect from the assessment year commencing April 1, 2004.

Proposed amendment of Section 10(10D)
In terms of the amended section, the sum received under an insurance policy, including bonus, if any, would be exempt from tax. However, the amount will not be exempt in the following circumstances:

• Any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA

• Any sum received under a Keyman insurance policy

• Any sum received under an insurance policy in respect of which the premium paid in any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured

However, the amount received under an insurance policy on the death of a person, will continue to be exempt under section 10(10D).

Interpretation: The proposed amendment could affect the exemption that a policyholder under a Single Premium Whole of Life policy would have enjoyed earlier. The exemption that an SPWL policyholder would have received on surrender or the 10th (or subsequent) anniversary of the policy may now be withdrawn, with effect from April 1, 2003. It is, hence, likely that the amount received from an SPWL policy (other than by way of a death claim) may be taxed in the hands of the policyholder.

It also appears that this amendment may cover all policies issued in the earlier years. As such, an amount received under an existing policy but received after April 1, 2003 may be taxed in the hands of the policyholder.

The opinion above is based on our understanding of the proposed amendment. The life insurance industry is in discussions with the regulators and government officials to repeal the proposed amendment. However, these changes, if accepted by the government will take place only after a few months, when the Budget comes up for approval in Parliament.

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