The Institute of Chartered Accountants of India (ICAI) has proposed a proposal regarding life insurance in the Pre-Budget Memoranda-2021. According to this proposal, ICAI has suggested to the Central Government that the policyholders should get tax relief on the policies of life insurance which are 10 years or more.
The institute has suggested that the tax exemption on life insurance should now be given on the basis of policy term and not on the ratio of premium and sum assured basis.
Tax benefit is not available on higher premium
According to the current rules, tax exemption is given on the basis of premium and even assured paid under section 10 (10D). Some life insurance policies pay higher premium due to old age, profession, lifestyle or illness and are also taxable. ICAI has written in its note that due to higher premium, policyholders do not get tax cover on insurance cover.
For policyholders paying higher premiums, ICAI has suggested that a policy of 10 years or more should provide tax exemption. This will also increase investment for the medium to long term.
Suggestion to consider life insurance policy as capital asset
According to the current system, the entire premium under section 10 (10D) on life insurance policy is not exempt. ICAI states that the premium deducted for calculating net income or loss at the time of surrender or withdrawal of a policy does not take into consideration inflation and consequently increases taxability. To address this issue, ICAI has suggested that a life insurance policy should be treated as a capital asset that falls under the definition of property under section 2 (4) of the Income Tax Act. This will give indexation benefit on the premium paid.
Suggestions for insurance companies too
ICAI has also suggested for insurance companies. The institute has said in its note that insurance companies should be allowed to carry forward and set off the business losses indefinitely. Under the current system, insurance companies can carry forward and set off business losses for up to 8 years. ICAI believes that this time limit is not sufficient.in