Personal Finance

Your Taxes

Sudhakar Sethuraman | Updated on May 31, 2020 Published on May 31, 2020

LIC has introduced, w.e.f. March 2, 2020, Nivesh Plus as a single-premium, non-participating, unit-linked, individual life insurance plan which offers insurance-cum-investment during the term of the policy. The proposer (say, parent/grandparent) can choose the amount of the single premium (not less than ₹1 lakh) with sum assured option ranging between 1.25 times and 10 times the single premium. In the case of the assured being a minor, the risk cover will commence on the assured completing eight years of age. The term of the policy is between 10 and 25 years of age and the minimum maturity age is 18 years (completed). The sum invested less premium allocation, policy administration and fund management charges will be utilised to buy units as per the fund type opted by the policyholder (or the proposer in the case of a minor), as the case may be. Units shall have a commencing NAV of ₹10 and LIC will declare the NAV on a daily basis.

I am considering this policy to create a corpus for my minor grandchild, now below five years of age. The policy automatically vests in the life of the assured on the policy anniversary immediately following the child completing 18 years of age. Please advise the tax implication of the proceeds received in the hands of the policyholder — the minor-turned-major — on his/her completing 18 years of age and at any time thereafter. Does the initial premium and the proceeds constitute a gift in the hands of the minor-turned-major?

BS Iyer

As per Section 56(2)(x) of the Income Tax Act, if money exceeding ₹50,000/any movable property with a fair market value exceeding ₹50,000 is received without consideration by an individual, it would be regarded as income for the recipient and taxable under the head ‘Income from other sources’, subject to certain exceptions. One of the exceptions is when money/property is received as gift from a relative. As per the I-T Act, the definition of relative includes ‘lineal ascendant’ and ‘descendant’. Accordingly, a single- premium contribution made by you on behalf of your grandchild could constitute a ‘gift’ and not subject to tax as per Section 56(2)(x) of the I-T Act.

It is recommended to keep the supporting documents substantiating the gift transaction, which could be useful if there are any queries from tax authorities at a later date. Further, the policy value vested upon your grandchild becoming a major could be claimed exempt under Section 10(10D), provided the single premium paid does not exceed 10 per cent of the sum assured. In other words, the sum assured should be at least 10 times the single premium paid to claim the tax exemption benefit on maturity.

The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in

Published on May 31, 2020
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