Readers are already told that section 58 (2)(y) of DTC 2010 has made all kinds of payments taxable . So, what if the life insurance product which you bought was based on the premise that the money collected by the Insurance Company shall be invested in equity market and the payments will be dependent on the result of investment in equity. Is payment under such an policy of life insurance taxable?
yes, it is taxable. But , if the Life Insurance company pays tax on distributed income , then the payment in hand of the insured shall not be taxed. This is provided in section 59(3)
(e) the amount included in income under clause (y) of sub-section (2) of section58, if tax on distributed income in respect of the insurance policy has been paid by the insurer under section 110;
Is all kinds of equity oriented life insurance policy eligible for such deduction?
No, as per section 110 of DTC 2010 , the tax on distributed income is applicable only in case of equity oriented life insurance product. The definition of “Equity Oriented ” is given in section 314(89) as under :
(89) “equity oriented” in relation to a scheme means the scheme—
(a) of a Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulations made thereunder; and
(b) which invests sixty-five per cent. or more of its investable funds in the form of equity shares in domestic companies, computed with reference to the annual average of the monthly averages of the opening and closing figures;
Therefore as per definition , the deduction u/s 89 can be claimed only in following circumstances
1. Life insurance company invests 65 % of investable funds to equity of domestic companies.
2. It pays distribution tax on any payments to insured person.
In all other cases, the amount received from insurance company is fully taxable.