The rule is applicable even to the sum received under a life insurance policy, including any bonus

The insurance claims that is provided to the policy holders as a result of death or disability will be liable to payment of income tax, provided, the new Direct Taxes Code proposals are implemented – reported The Hindu Business Line.

The code suggests that contributions by the insured are subject to the EET method of taxation of savings. The rule is applicable even to the sum received under a life insurance policy, including any bonus, which is taxed.

The source claims that a pure life insurance policy falls under tax exemption. In a pure life insurance policy, the policy holder receives money only when death occurs.

Life insurance companies are disturbed that the tax proposal could hamper their business. Life insurers are taking up the issue with the government through the Life Insurance Council.

According to an insurance company official, the council is sending its suggestions to the government and the regulator.

Kamalji Sahay, CEO of Star Union Dai-ichi Life Insurance, said: “Even if you are in the lower tax bracket, when you get the sum assured, it will be a lumpsum amount. This would catapult you to a higher tax bracket and you will pay higher taxes.

V. Srinivasan, CFO of Bharti AXA Life Insurance, said: “Only term insurance policies would be exempted. Both ULIPs and traditional products would be taxed. The return would be taxed even in case of disability or death.”

The code has a section which says that maturity proceeds of an insurance policy shall be exempt only if the premium does not exceed 5% of the capital sum assured.

S.B. Mathur, secretary-general of Life Insurance Council, said: “It is not clear whether the tax would be applied on the basis of the real value of money invested or on the nominal value,” quoted the newspaper.