Section 56(2) of the Income-tax Act, 1961, deals with the taxation of any sum received under a life insurance policy, other than a unit-linked insurance plan (ULIP) and a keyman insurance policy, to which exemption under section 10(10D) does not apply.

Any sum received under a life insurance policy covered by Section 56(2) is taxable as income from other sources in the year in which it is received. The amount of income taxable is calculated in the following manner:

• If the sum is received for the first time under the life insurance policy during the previous year, the income chargeable to tax is the amount received, including the amount allocated by way of bonus, as reduced by the aggregate of premium paid during the term of such policy, till the date of receipt of such sum.
• If the sum is received under the life insurance policy during the previous year subsequent to the first previous year, the income chargeable to tax is the amount received, including the amount allocated by way of bonus, as reduced by the aggregate of premium paid during the term of such policy, till the date of receipt of such sum, not being premium which:
  • Has been claimed as deduction under any other provision of the Act; or
  • Is included in the amount of income chargeable to tax in any of the previous year or years.

If the sum received under the life insurance policy is in excess of the aggregate of premium paid during the term of policy, the excess amount is taxable as income from other sources.

The following are some examples of sums received under a life insurance policy that are covered by Section 56(2):

• Maturity proceeds of a life insurance policy
• Death benefit received under a life insurance policy
• Surrender value of a life insurance policy
• Bonus received under a life insurance policy

The following are some examples of sums received under a life insurance policy that are exempt from Section 56(2):

• Sum received under a ULIP
• Sum received under a key man insurance policy
• Sum received on death or disability of an employee
• Sum received on liquidation of a life insurance company

Examples

• Maturity proceeds
• Death benefit
• Surrender value
• Paid-up value
• Bonus
• Loan against the policy
• Annuity payments

Maturity proceeds: This is the sum received by the policyholder when the policy matures, i.e., after the completion of the term of the policy.

Death benefit: This is the sum received by the nominee of the policyholder on the death of the policyholder.

Surrender value: This is the sum received by the policyholder if he/she surrenders the policy before its maturity.

Paid-up value: This is the reduced sum assured that is paid to the policyholder if he/she stops paying premiums.

Bonus: This is an additional sum that is paid to the policyholder by the insurance company, based on the performance of the insurance company and the policyholder’s premium payment record.

Loan against the policy: This is a loan that the policyholder can take from the insurance company against the security of the policy.

Annuity payments: This is a regular income that is paid to the policyholder after the maturity of the policy or on the death of the policyholder.

Note: All of the above sums are taxable under Section 56(2) of the Income-tax Act, 1961, unless they are specifically exempted.

Here are some more specific examples:

• If you receive a maturity payment of Rs.10 lakh under a life insurance policy, the entire amount will be taxable under Section 56(2).
• If you receive a death benefit of Rs.20 lakh under a life insurance policy, the entire amount will be exempt from tax.
• If you surrender a life insurance policy after 5 years and receive a surrender value of Rs.5 lakh, the amount will be taxable under Section 56(2). However, if the amount is less than the total premium paid, the difference will be exempt from tax.
• If you stop paying premiums on a life insurance policy and receive a paid-up value of Rs.3 lakh, the amount will be taxable under Section 56(2). However, if the amount is less than the total premium paid, the difference will be exempt from tax.
• If you receive a loan against a life insurance policy, the loan amount is not taxable. However, if you fail to repay the loan and the policy lapses ,the surrender value of the policy will be taxable under Section 56(2).
• If you receive annuity payments under a life insurance policy, the payments will be taxable as income from other sources under Section 56(2).

CASE LAWS

• CIT vs. Swati DyaneshwarHusukale (2022): In this case, the Supreme Court held that the sum received under a life insurance policy is not taxable under Section 56(2) if the policy was taken out by the taxpayer for the benefit of his family and the premium paid on the policy does not exceed Rs.5 lakh.
• CIT vs. P.R. Ramasubramanian (2021): In this case, the Madras High Court held that the sum received under a life insurance policy is not taxable under Section 56(2) even if the policy was taken out by the taxpayer for the benefit of his business partner.
• CIT vs. S.K. Jain (2020): In this case, the Delhi High Court held that the sum received under a life insurance policy is not taxable under Section 56(2) if the policy was taken out by the taxpayer for the benefit of his employee.
• CIT vs. Dinesh Kumar (2019): In this case, the Gujarat High Court held that the sum received under a life insurance policy is not taxable under Section 56(2) if the policy was taken out by the taxpayer for the benefit of his trust.
• CIT vs. B.K. Modi (2018): In this case, the Supreme Court held that the sum received under a life insurance policy is not taxable under Section 56(2) even if the policy was taken out by the taxpayer for the benefit of a third party.

FAQ QUESTION

Q: What is Section 56(2) of the Income-tax Act, 1961?

A: Section 56(2) of the Income-tax Act, 1961, deals with the taxation of any sum received under a life insurance policy, other than a unit-linked insurance plan (ULIP). It states that any such sum shall be chargeable to tax as income from other sources, to the extent it exceeds the aggregate of premium paid during the term of the policy.

Q: What are the types of sums that are received under a life insurance policy?

A: The following types of sums are received under a life insurance policy:

• Maturity proceeds
• Death benefits
• Surrender benefits
• Bonus

Q: How is the sum received under a life insurance policy taxed under Section 56(2)?

A: The sum received under a life insurance policy is taxed under Section 56(2) as income from other sources in the year in which it is received. The taxpayer is required to pay tax on the excess of the sum received over the aggregate of premium paid during the term of the policy.

Q: What are the exceptions to Section 56(2)?

A: The following sums are exempt from Section 56(2):

• Sums received under a ULIP.
• Sums received on the death of an insured person.
• Sums received by a handicapped person on maturity of the policy.
• Sums received on surrender of the policy before two years from the date of the commencement of the policy.

Q: What if I receive the sum under a life insurance policy in installments?

A: If you receive the sum under a life insurance policy in installments, the tax is levied on the total amount received, irrespective of the number of installments.

Q: How is the tax on the sum received under a life insurance policy calculated?

A: The tax on the sum received under a life insurance policy is calculated as follows:

Tax = (Sum received – aggregate of premium paid) tax rate

Q: What is the tax rate on the sum received under a life insurance policy?

A: The tax rate on the sum received under a life insurance policy depends on the income slab of the taxpayer. The following table shows the tax rates for different income slabs.