When Taragauri Doshi’s husband died, an assessing officer wanted to tax the proceeds from a life insurance policy that had been bought abroad. Homi Mistry, Mousami Nagarsenkar & Hiral Tanna explain why such proceeds are not taxable in India.
Nowadays, it is quite common for people to go abroad on assignments and even live in foreign countries for long periods. The life insurance policies that they had bought in India may not suffice to provide adequate protection, given the higher standard of living abroad and the additional risk that arises from exchange-rate fluctuations (if the rupee depreciates against the foreign currency). Many such people purchase life insurance products outside India to cover their families and themselves adequately. This raises the interesting question whether maturity proceeds received from a policy purchased outside India should be subject to taxation in India.
Protection and tax benefits
In a world of uncertainty, life insurance comes as a blessing for the family, especially those that have only one primary earning member. In case of an unfortunate event, insurance proceeds ensure that the family is able to maintain the standard of living it is accustomed to, and is also able to meet major financial goals, such as children’s education and marriage, spouse’s retirement, and even contingencies like prolonged ailments.
To be able to protect the family adequately, it is important that the appropriate amount of insurance cover is purchased. Generally, it is prudent to buy sufficient insurance so that the family is able to maintain its standard of living, even if the breadwinner passes away. The sum assured should be enough so that when reinvested, the returns should be equivalent to the remuneration that the breadwinner normally earned.
While most people primarily buy life insurance to provide adequate monetary support to the family in case of the untimely demise of the insured, there is also no doubt about the fact that the tax deduction available on premium paid also encourages investment in this product. Even at the time of maturity of the policy, subject to certain conditions, the insurance proceeds are exempt under Section 10(10D) of the Income-Tax Act, 1961.
Exemption is available subject to the condition that the premium payable for any of the years during the term of the policy does not exceed 10 per cent of the actual capital sum assured.
However, in the case of life insurance policies issued on or after April 1, 2003 but before March 31, 2012, exemption will be available if premium payable in any of the years does not exceed 20 per cent of the sum assured. Note also that any sum received under a Keyman insurance policy is not exempt under Section 10(10D) of the Act.
One case regarding taxation of proceeds from a policy purchased abroad came up before the Mumbai Tribunal recently (Taragauri Doshi vs. income tax).
In this case, the assessee received maturity proceeds from her spouse’s life insurance policy from The American Insurance Company in Abu Dhabi. The policy was purchased when the assessee’s spouse worked in Abu Dhabi. The assessing officer (AO) taxed the said receipt in the hands of the assessee by holding that the provisions of Section 10(10D) of the Act are not applicable because the policy was not taken from any Indian life insurance company in accordance with Section 2(28BB) of the Act. According to Section 2(28BB), insurer refers to an Indian insurance company as defined under the Insurance Act, and in this case the insurance was taken from a foreign company.
On appeal, the Commissioner of Income Tax (Appeals) upheld the view taken by the AO. The assessee then appealed before the tribunal.
The assessee’s representative referred to Clause (10D) of Section 10 of the Act and submitted that any sum received under a life insurance policy, including the sum allocated by way of bonus, is exempt from tax. He further argued that clause (10D) of Section 10 of the Act does not refer to the word "insurer" in the entire clause, as opposed to Section 80C and Section 88, wherein insurer has been referred to. Hence, he submitted that it would not be proper to read the word "insurer" into Section 10(10D) of the Act.
The Tribunal held that from the bare reading of the provisions of Section 10(10D) of the I-T Act, any sum received under a life insurance policy is eligible for exemption, except in the case of exceptions as culled out under Clauses (a) (b) and (c). It is not the case of the revenue that the assessee falls under any of the exemptions as enumerated in Clauses (a) (b) and (c) of Section 10(10D).
Hence, the only question is whether any sum received under the life insurance policy taken from a non-Indian insurance company is eligible for exemption under Section 10(10D) of the Act.
In this context, the Tribunal noted that though the term "insurer" has been defined under the Act to be an Indian insurance company, Section 10(10D) of the Act, which governs exemption of maturity proceeds from life insurance, does not specify any such condition.
Hence, the Tribunal concluded that there was no intention of the legislature to restrict the benefit of exemption under Section 10(10D) of the Act only to an insurance policy taken from an Indian insurance company. Hence, it held that the assessee is eligible to claim exemption on maturity proceeds received from The American Life Insurance Company.
However, note that this is a decision of the Tribunal. In the absence of a high court or Supreme Court ruling on this matter, tax officers may not always exempt the proceeds from a foreign life insurance policy.
Homi Mistry is partner, Mousami Nagarsenkar is director and Hiral Tanna is deputy manager at Deloitte Haskins and Sells.