The Income Tax Act, 2025 treats proceeds from life insurance policies (other than ULIPs) that are not exempt under Schedule II as income chargeable under the head "Income from other sources" under Section 92(2)(l)【92†L0】. Rule 59 of the Income Tax Rules, 2026 provides the detailed computation methodology【59†L0】. Understanding this framework is essential for taxpayers receiving life insurance policy proceeds.
The Statutory Framework
Section 92(2)(l)
Section 92(2)(l) provides that where any sum, including bonus allocated, is received during a tax year under a life insurance policy, other than【92†L0】:
- Sums received under a unit linked insurance policy
- Income referred to in clause (d) (Keyman insurance policy)
and such sum is not to be excluded from the total income of that tax year under Schedule II (Table: Sl. No. 2), the sum exceeding the aggregate of the premium paid during the term of such life insurance policy, and not claimed as a deduction under this Act, computed in such manner, as may be prescribed.
Rule 59
Rule 59 provides the detailed computation methodology for income chargeable to tax under Section 92(2)(l)【59†L0】.
The Computation Methodology
First Receipt Scenario
Where the sum is received for the first time under the life insurance policy during the tax year (herein referred to as first tax year), the income chargeable to tax in the first tax year shall be computed in accordance with the formula【59†L0】:
Income = A − B
Where:
- A = The sum or aggregate of sum received under the life insurance policy during the first tax year
- B = The aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum in the first tax year that has not been claimed as deduction under any other provision of the Act
Subsequent Receipt Scenario
Where the sum is received under the life insurance policy during the tax year subsequent to the first tax year (hereinafter referred to as subsequent tax year), the income chargeable to tax in the subsequent tax year shall be computed in accordance with the formula【59†L0】:
Income = C − D
Where:
- C = The sum or aggregate of sum received under the life insurance policy during the subsequent tax year
- D = The aggregate of the premium paid during the term of the life insurance policy till the date of receipt of the sum in the subsequent tax year not being premium which:
- Has been claimed as deduction under any other provision of the Act
- Is included in amount 'B' or amount 'D' in any of the year or years preceding the tax year
Definition of Sum Received
For the purposes of Rule 59, the sum received under a life insurance policy shall mean any amount, by whatever name called, received under such policy that is not excluded from the total income of the tax year in accordance with the provisions of Schedule II (Table: Sl. No. 2), other than the sum【59†L0】:
- Received under a unit linked insurance policy
- Being the income referred to in Section 92(2)(d) (Keyman insurance policy)
Applicability
Policies Covered
Rule 59 applies to life insurance policies other than:
- Unit linked insurance policies
- Keyman insurance policies
- Policies where exemption under Schedule II (Table: Sl. No. 2) applies
Exemption Not Applicable
The computation applies where the exemption under Schedule II (Table: Sl. No. 2) does not apply. This occurs when:
- The premium to sum assured ratio exceeds the prescribed limits
- The aggregate premium exceeds the prescribed limits
Practical Example
Scenario
Mr. B holds a life insurance policy with the following details:
| Item | Amount (₹) |
|---|---|
| First receipt | 3,00,000 |
| Premium paid till first receipt | 2,00,000 |
| Second receipt | 2,00,000 |
| Premium paid till second receipt | 3,50,000 |
| Premium already considered for calculation | 2,00,000 |
Computation
First Receipt: Income = A − B = 3,00,000 − 2,00,000 = 1,00,000
Second Receipt: C = 2,00,000 D = 3,50,000 − 2,00,000 = 1,50,000 Income = C − D = 2,00,000 − 1,50,000 = 50,000
Total Income = 1,00,000 + 50,000 = 1,50,000
Compliance Requirements
Record Keeping
Maintain records of:
- Life insurance policy documents
- Premium payment receipts
- Bonus allocation statements
- Receipt of proceeds
Tax Return Filing
The income must be reported in the tax return under the head "Income from other sources".
Expert Legal Guidance
Understanding the taxation of life insurance policy proceeds is essential for taxpayers receiving such proceeds. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping taxpayers compute income correctly and ensure compliance with reporting requirements.