LIC's Bima Nivesh Policy: treatment of premium

QUESTION: (a) This is a one time premium payment policy of Life Insurance Corporation of India and has two options, namely, a five-year and a ten-year policy. (b) The one time premium is a variable amount depending upon the sum assured as is with the other schemes.

(c) A discount is allowed from the one time premium amount. For example, in the case of policy enclosed, for a sum assured of Rs. 57,183 is a premium payable, the balance being of the discount offered. The maturity amount varies depending on the tenure.

Which amount qualifies for rebate under Section 88 of the Income- tax Act, 1961? Is the amount actually paid, namely, Rs. 57,183 (net of discount) or the sum insured, namely, Rs. 60,000?

It may kindly be noted that ICICI Prudential Insurance and State Bank of India Insurance venture have also come out with similar schemes recently.

It appears that the amount finally received on maturity of the policy is exempt from income-tax under Sec. 10(10D). Kindly clarify the same, as the scheme is not clear on this.

ANSWER: Sec. 88 was amended by the Finance Act, 1995, with effect from assessment year 1996-97 omitting sub-section (3), which had earlier limited rebate for premium to 10 per cent of the actual capital sum assured so that the premium paid for single premium policies and other policies with shorter period before maturity could not fully qualify for deduction of the entire payment.

Now that the bar is removed, the premium paid on account of such policies also qualify for tax rebate without restriction with reference to the sum assured. Since Bima Nivesh Policy issued by the LIC is also one insuring life, premium paid towards the same qualifies for tax rebate under Sec. 88(2)(i) of the Act, without reference to sum assured, but subject only to overall limit under Sec. 88.

Bima Nivesh Policy, 2001, allows assurance of sum assured from Rs. 25,000 to Rs. 50 lakhs by payment of a single premium. It is available for all those in the age group between 18 and 75 years, with policy term at 5 or 10 years.

There are guaranteed additions 7.5 per cent/ 8.5 per cent compounded annually for 5/10 years of the policy. In addition, loyalty addition may also be payable on maturity.

To take an illustration, premium payable for Rs. 50,000 policy is Rs. 47,374 / 42,969 for 5/10 year term with interest working out at 8.67 per cent / 9.40 per cent for persons in the age group between 18-60 years. Senior citizens are given marginally higher return for the same policies at 8.78 per cent / 9.45 per cent for 5/10 year policies. Premium is eligible for tax rebate at 20 per cent, while maturity amount is not liable to tax under Sec. 10(10D) of the Income-tax Act.

What is obviously referred as discount by the reader is difference between sum assured and premium payable.

Even if some other discount is made available, the query is still whether the assessee is entitled to the gross amount before deduction or only to the net amount.

Sec. 88(2) allows deduction of ``any amount paid or deposited in the previous year by the assessee out of his income chargeable to tax''. Since what is paid or deposited alone is allowed, it is most unlikely that Revenue would accept deduction of gross amount.

The position of law as regards discount as had been decided in sales tax cases is that discount or rebate allowed at the time of payment is an abatement of price distinguishable from commission on sales as had been pointed out in the context of meaning of sale price, because it is the net price which should be treated as bargain price as held in Deputy Commissioner of Sales-tax v Advani Oerlikon (P) Ltd. (1980) 45 STC 32 (SC). If the amount had been allowed as bonus after the payment.

As for the similar schemes issued by private sector, if it is a contract ``on the life of persons'', it will automatically qualify for relief.

Where a notification is required under Sec. 88(2)(xiiia) for annuity policies issued by LIC, law has since been amended enabling such notification for such annuity policies issued by private insurers by an amendment to the clause by Finance Act, 2001 with effect from April 1, 2002 subject to notification.

As for the final payment on death or maturity, such amounts being capital receipts would not be taxable. It has also been specifically declared exempt by way of a clarificatory amendment by Finance (No.2) Act, 1991 with retrospective effect from April 1, 1962 by Sec. 10(10D) exempting as ``any sum received under life insurance policy including the sum allocated by way of bonus on such policies'' other than Keyman insurance policy, the proceeds of which is now specifically made taxable.

Increments of higher qualification are also salary

Q: Now I have a question regarding clarification on income-tax Notification No. 86/16/F.No.142/4/92 regarding exemption of tax on the increments provided to individuals towards acquiring higher qualification. Earlier, the amount received during the year was exempted from working the taxable income. Confirm whether this notification is still existing for the current financial year 2001-02. If not, kindly clarify whether such amount is covered under any other sections of Income-tax Act for the current financial year.

A: An increment being part of salary cannot be exempt. No Notification as indicated in the reader's letter exists. Apparently the notification has been wrongly cited and has been misunderstood.

TDS on transport contracts

Q: In The Hindu dated June 21, 2001 answering a query on TDS from payments for transportation of excavated materials, you have clarified that if the hire of the tippers was with reference to the time for which they were hired, the hire charges would not be liable for TDS. This clarification appears to be very confusing. Evidently, your answer implies that if a tipper is hired on a daily, weekly, or monthly basis, no tax would be deductible at source from the hire charges paid, irrespective of the quantum thereof and the nature of work involved.

Your interpretation could very well be used by contractors to avoid TDS, while hiring tippers for the very same jobs. Without insisting on the number of trips run, or the quantum transported, the contractor can offer an incentive to the driver of the tipper for the number of trips run, and still pay hire charges on monthly basis to the owner, and thus avoid TDS.

No doubt, further clarification from your end would certainly be enlightening to a large number of professionals, contractors and tipper owners.

A: No amount of clarification or information in these columns will help taxpayers to avoid problems as regards tax deduction at source in borderline cases, unless an official clarification is forthcoming from Revenue.

If the reader who is a chartered accountant in practice at Mumbai believes that tax deduction is necessary even in such cases, where it was felt that it may not be necessary, his proper advice should be that tax is deductible to avoid any hassles with the Income-tax Department allowing the payee to fend for himself. But the fact that terms of contract may be so devised so as to get out of liability for TDS and if it could be so done, there will be abuse of the provision is hardly an argument for advising tax deduction, where such terms do not attract the provision.

Rebate on insurance premium: gross or net

Q: This refers to your answer to the query titled `Rebate for insurance premium - whether available for interest' in Tax Forum dated May 31.

In my view, Sec. 88(8) defining insurance policy does not specifically exclude insurance policies revived/renewed by paying belated premium with interest. Moreover, the words used in Sec. 88(2) are only `any sum paid or deposited' which very much seem to cover interest on belated payment of premium also.

To cap it all, Life Insurance Corporation allows the renewal of policies on belated payment of premium with all the benefits as per the terms of the policy.

In the light of the above I am of the view that the interest also will qualify for rebate under Sec. 88. I shall be grateful for a line in reply.

A: A liberal view as suggested by the reader Mr. S. R. N. Rajhendran, who is a practising chartered accountant, is possible. In such matters one may not be justified in taking the risk of a view favourable to oneself, unless either the law is clear or a liberal interpretation is forthcoming from the Board.

As otherwise one may be experimenting with the law at some risk, which one would like to avoid. `Any sum paid or deposited' is reasonably understood in the context of reference `to effect or to keep in force an insurance' under Sec. 88(2)(i) as limited to premium and not to interest.

S. Rajaratnam

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