Any sum received from Life Insurance Policies -whether it was bonus or other wise was completely tax free under Income Tax Act. Only exception was that if the premium paid in year exceeded 20 % of the sum insured , in that case only exemption of the receipt was taken away.
Now the Direct Tax Code 2010 has not only reduced the 20% premium criteria to 5 % but also put additional condition that even in that case if for any reason the money is received before the term, in that event all money received from such life insurance policy shall be taxable as income from residuary head. Read the section 58(2)(y) of the Direct Tax Code
58 (2) The gross residuary income shall, in particular and without prejudice to the generality of the provisions of sub-section (1), include the following, namely:—
…….
(y) any amount including bonus, if any, received or receivable under a life insurance policy from as insurer on maturity or otherwise.
The deduction for people fulfilling condition is given in section 3 . Read
(3) The amount of deduction referred to in clause (b) of sub-section (1) shall be the following, namely:—
(d) the amount included in income under clause (y) of sub-section (2) of section 58 in respect of an insurance policy where—
(i) the premium paid or payable for any of the years during the term of the policy does not exceed five per cent. of the capital sum assured; and
(ii) the amount is received only upon completion of original period of contract of the insurance;
So, if you take a life policy of Rs 3,00,000 for 20 years, the receipt will be tax free only if you do not pay premium more than R 15,000 in one year and also receive the amount only after 20 years.
Bad indeed !