JEEVAN ASTHA POLICY OF LIC-WHETHER EXEMPT UNDER SECTION 10(10D) OF INCOME TAX ACT

[CA. Santosh Bauskar]

JEEVAN ASTHA POLICY OF LIC-WHETHER EXEMPT UNDER SECTION 10(10D) OF
THE INCOME-TAX ACT, 1961?
 

Srinivasan Anand G.
 

The author has examined the new Jeevan Astha Policy launched by LIC
from the angle of whether it complies with section 10(10D) of the
Act in the light of the provisions of the Act and CBDT's Circular.
As the policy complies with the "minimum five times insurance cover"
requirements only in the first year of the policy term of 5/10
years, the author points out that whether policy will qualify under
section 10(10D) is not free from doubt and CBDT should clarify
matters.
 

INTRODUCTION

1.0.The LIC has launched a new insurance product "Jeevan Astha" on 8-
12-2008 which will remain open for subscription till 21-1-2009. The
write-up and illustrations put up by LIC on its website show that it
is a single premium policy with term of 5years/
10years. The sum assured is six times the single premium in the
first year and twice the single premium from the second year
onwards. The investor will get back the single premium
plus .guaranteed additions @9% p.a. in case of a 5year policy . In
case of a 10 year policy, he will get back single premium
plus .guaranteed additions @10% p.a. This policy is claimed as
better than bank deposits as interest on bank deposits are not tax
free and don't have any life cover while the returns from Jeevan
Astha life policy will enjoy tax exemption under section 10(10D) of
the Income Tax Act,1961(hereinafte r referred to as the "Act"). It
needs to be examined whether the Jeevan Astha policy is compliant
with the requirements of sections 10(10D) of the Act. This is
because section 10(10D) requires that the actual capital sum assured
should be at least five times the premium in order to for the income
from policy to qualify for exemption under section 10(10D) of the
Act. In Jeevan Astha this mandatory requirement of section 10(10D)
is met only in the first year of the policy.

SECTION 10(10D) VERSUS SECTION 80C

2.0.Section 10(10D)(c) of the Act provides that the exemption
thereunder shall not apply to "any sum received under an insurance
policy issued on or after the 1st day of April,2003 in respect of
which the premium payable for any of the years during the term of
the policy exceeds twenty per cent of the actual capital sum
assured"

 According to section 80C(3), deduction under section 80C
shall be admissible "only to so much of any premium or other payment
on an insurance policy…… as does not exceed twenty percent of the
actual capital sum assured".

For the purposes of sections 10(10D) and 80C, for calculating "actual sum assured",

no account shall be taken of (i)premiums agreed to be returned; and (ii) any benefit by
way of bonus or otherwise over and above the sum actually assured.
It can be seen that the provisions of section 10(10D) are stricter
than those of section 80C.The plain words of Section 80C(3) seem to
imply that deduction will be given to life insurance premium to the
extent of 20% of actual capital sum assured. Deduction will be
denied to so much of the premium as exceeds 20% of actual
capital sum assured. On the other hand, section 10(10D) is an "all
or nothing" affair. If premium is 20% or less of actual capital sum
assured, the entire income received under the policy will be tax-
free. If not, the entire income from the policy(not including the
premium paid by the assessee) shall be taxable..

WHETHER THE PREMIUM SHOULD BE MAINTAINED AT 20% OR LESS OF CAPITAL
SUM ASSURED THROUGHOUT THE TERM OF THE POLICY.?
3.0.As mentioned above, in Jeevan Astha policy, the requirement that
premium should not exceed 20% of the sum assured is met only in the
first year. From the second year onwards the sum assured is only
twice the premium. This raises the question whether the ratio needs
to be maintained throughout the policy term?. The provisions of
section 10(10D) do not appear to say anything clearly in this
regard. CBDT's Circular No.7/2003 dated 5-9-2003 explains
that "insurance policies with high premium and minimum risk covers
are similar to deposits or bonds" and such insurance policies should
be "treated at par with other investment schemes(such as bonds or
deposits)", Para 10.3 of the said Circular reads as under:
"10.3 The insurance policies with high premium and minimum risk
covers are similar to deposits or bonds. With a view to ensure that
such insurance policies are treated at par with other investment
schemes, amendments have been made in section 88 and clause (10D) of
section 10. The existing clause (10D) of section 10 has been
substituted so as to provide that the exemption available under the
said clause shall not be allowed on any sum received under an
insurance policy issued on or after the 1st day of April, 2003, in
respect of which the premium payable in any of the years during the
term of the policy, exceeds twenty per cent of the actual capital
sum assured. In view of this, the income accruing on such policies
(not including the premium paid by the assessee) shall become
taxable………."
From CBDT's Circular, it appears that to qualify for exemption under
section 10(10D) of the Act, it would be necessary to comply with
the "minimum five times cover" requirement throughout the term of
the policy and not merely during the first year. Since Jeevan Astha
complies with this only in the first year out of the total tenure of
5 years or 10 years, and offers a cover of only two times the
premium for rest of the policy term, it can be argued that Jeevan
Astha is an insurance policy with high premium and minimum risk
cover and should be treated on par with deposits and bonds. It can
also be contended that Jeevan Astha really is a fixed deposit with
LIC with free nominal insurance cover of twice the deposit amount
given for the entire policy term except the first year. Therefore,
it can be argued that Jeevan Astha is not compliant with section 10
(10D) of the Act in letter and spirit.
 

CONCLUSIONS
4.0.As noted above, in Jeevan Astha, the requirement of section 10
(10D) that actual capital sum assured should be at least five times
the premium is met only in the first year out of a policy tenure of
5 years/10 years.

 

Thus, whether the policy complies with sections 10
(10D) of the Act is not free from doubt. It is in the public
interest that CBDT clarifies the tax implications of the Jeevan
Astha policy.


--
CA. Santosh Bauskar
Partner - M/s Rahul Bajaj and Co
Chartrered Accountants
B-4, Anudeep Park,
Near Tupsakhare Lawns,
Tidke Colony
Nashik 422 002
India
Call @ +91 93250 29252, +91-253-2314120