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Presentation on

TAXATION ASPECTS OF
INSURANCE & BANKING

at

Post G
P Graduate
d Di
Diploma
l in
i
Banking and Insurance
(PGDBI)
Persons under IT Act

1. Individual
2. Hindu Undivided Family
3. Company
4
4. Firm
5. Association of persons or Body of Individuals
6. Local authority
7. Artificial juridical person
Important concepts of IT Act

1. Residential status
2. Previous year
3. Assessment year
4
4. Taxable income
5. Exempted income
6. Gross Total Income
7. Deductions
8. Total Income
9. Tax deducted at source
10. Maximum amount not chargeable to tax
Heads of Income under Income
Tax (IT) Act, 1961
1. Salaries
2. House property
3. Business or profession
4
4. Capital Gains
5. Other Sources
Computation of tax payable
Particulars Amount (Rs.)
Salaries XX
House Property XX
Business or Profession XX
Capital Gains XX
Other Sources XX
Gross Total Income XXXX
Deductions XX
Total Income XXXX
Tax payable on Total income ###
Tax deducted at source ##
Self assessment tax ##
Types of Insurance
Broadly Insurance are of following types:
• Life
f Insurance
• General Insurance (Other than Life Insurance)
• Health Insurance
• Vehicle Insurance
• Crop Insurance
• Plant and Machinery, Stock, Cash Insurance etc.
Taxation aspect on Insurance
• For Individuals and HUF
• Benefits for deduction from GTI
• Benefits by way of Exempted Income
• Benefits in form of salary
• For all Persons
• Benefit under the head of Business and profession
• Provisions for Life insurance agents etc.
• Insurance receipts
p chargeable
g as capital
p g
gain
• Benefits to Insurance Providers
• TDS Provision of Insurance commission
Benefits by deduction from Gross
total income
Maximum amount deductible u/s 80C, 80CCC
and 80CCD cannot exceed of Rs.
Rs 1,00,000/-
1 00 000/
Under section 80C
1. Payment of Life Insurance Premium:
¾ Subject to maximum of 20% of sum assured. Sum
assured does not include any premium agreed to be
returned or any benefit by way of Bonus.
¾ P li
Policy should
h ld be
b taken
t k on own life,
lif life
lif off the
th spouse or
any Child. In case of HUF, any member of HUF.
¾ Covers payment made by government employees to
Central Govt.
Govt Employees
Employees’ Insurance Scheme and
payment made by a person under Children's
Endowment assurance policy.
¾ Minimum period of investment – 2 years
Benefits by deduction from Gross
total income (contd..)
2. Payment in respect of non-commutable
d f
deferred
d annuity:
i
¾ Annuity plan can be taken in the name of the
individual, spouse life or any child of such Individual.
N benefit
No b fit to
t HUF.
HUF
3. Contribution made towards participating in the
Unit Linked Insurance Plan (ULIP)
¾ ULIP of UTI and of LIC Mutual fund. It can be covered
in the name of individual, spouse and any child.
¾ Minimum period of holding – 5 years
¾ Consequences if termination made before 5 years:
ƒ Contribution during the year will not qualify for deduction
ƒ Any deduction taken earlier would be deemed to be
i
income i the
in th year in
i which
hi h plan
l i terminated.
is t i t d
Benefits by deduction from Gross
total income (contd..)
Under section 80CCC
• Pension fund held with an Insurer:
¾ Benefit is given only to Individual.
¾ He had deposited
p any
y sum under an annuityypplan of LIC
and any other insurer in the Previous year.
¾ The aforesaid amount must be paid out of taxable
income. Not necessary that it should be paid out of the
income of current year.
¾ Surrender value of annuity before maturity date will
become taxable in the year of receipt of SV.
¾ Receipt of pension by individual or nominee after
maturity is taxable as income in the year of receipt.
¾ No deduction under this section, if same is already
claimed
l i d iin section
ti 80C
80C.
Benefits by deduction from Gross
total income (contd..)
Under section 80D
• Deduction in respect of Medical insurance
premium:
¾ Thee be
benefit
e t issaavailable
a ab e to Individual
d dua a and
d HUF.
U
¾ Mediclaim Insurance Policy framed by General
Insurance Corporation of India and approved by Central
Government.
¾ Similar Scheme by any other insurer approved by
Insurance Regulatory and Development Authority shall
also be eligible for deduction.
¾ Payment: Can be paid by any mode other than Cash.
¾ Must be paid out of Taxable Income.
Benefits by deduction from Gross
total income (contd..)
¾ Mediclaim Policy can be taken of following persons:
Taxpayer Insured person
Individual Taxpayer himself, spouse, Parents or
Dependent Children of the Taxpayer
HUF Any member of HUF

¾ Amount of Deduction:
C
Category D d
Deduction
i (R
(Rs.)
)
Self (other than senior citizen) 15,000
Self (Senior citizen) 20,000
Self + Parents (other than senior 15,000 + 15,000
citizen)
Self + Parents ((senior citizen)) 15,000
, + 20,000
,
Case Study

1. Say, In P.Y. 2009-10, A has paid for mediclaim insurance


R 25000 on himself.
Rs. hi lf He
H has
h alsol paid
id Rs.
R 25000 for
f
mediclaim for his parents. The deduction u/s 80D are to
be calculated:
¾ A and his parents are not senior citizen:
Deduction will be Rs. 15000+ 15000= Rs. 30000
¾ A is not senior Citizen but his parents are senior citizen,
then deduction will be 15000+ 20000=35000
¾ A and His parents both are senior citizens:
Deduction will be Rs. 20000+20000=40000
¾ A
Assume, he
h has
h taken
t k mediclaim
di l i only
l on himself
hi lf andd paid
id
Rs. 35000/- then deduction will be 15000 and 20000 if he
is senior citizen
Benefits by deduction from Gross
total income (contd..)
Under section 80DD
• For medical treatment of dependent being a
person with disability
¾ Taxpayer
a paye must
ust be resident
es de t Individual
d dua o or HUF.
U
¾ The taxpayer has two options:
ƒ He incurs the expenditures himself for treatment, training
and rehabilitation of dependent disabled person.
ƒ He has taken a policy under any scheme framed by LIC or
any other insurer for maintenance of dependent disabled
person. Annuity should be for the benefit of disabled.
¾ Dependent means wholly holl and mainly
mainl dependent
spouse, child, parent and brother or sister in case of
individual and any member in case of HUF.
Benefits by deduction from Gross
total income (contd..)
¾ Person with disability means as defined in Disability
(E
(Equall opportunities
t iti andd protections
t ti off rights
i ht and
d full
f ll
participation) Act, 1995. It includes autism, cerebral
palsy or multiple disability, etc.
¾ Disability should not be less than 40%.
40%
¾ Assessee required to furnish a certificate from medical
authority in Form-10IA or as prescribed in Disabilities
Act along with the return of Income.
Income
¾ No deduction if also claimed under section 80U
¾ Benefits:
ƒ A fixed deduction of Rs.
Rs 50000/-.
50000/-
ƒ If disability is severe, higher deduction of Rs. 100000.
Severe Disability means disability of 80% or more.
¾ Taxability
a ab ty o of maturity
atu ty p
proceeds
oceeds if d
disabled
sab ed pe
person
so
predeceases the person who makes contribution
Benefits as Exempted Income

Under section 10(10A):


• Any annuity plan of LIC from any fund set up.
• Payment received by way of Commutation of pension.
• Commutation is a Lump p sum p payment
y in lieu of
periodical payment.
Under section 10(10D):
• Maturity proceeds (including bonus) received from life
insurance policy is not chargeable to tax.
• Exceptions:
• Any sum received u/s 80DD(3).
80DD(3)
• Any sum received under Key man insurance policy.
• Sum received from a policy issued after 31st March, 2003,
where ppremium ppaid exceeds 20% of sum assured. But if
received on death, then will not be taxable.
Benefits in form of Salary
Assurance on Life of an employee:
Amount paid by Taxability
Employer Taxable as salary
Former employer Taxable as profit in lieu of Salary
Any third person Taxable as income of other source u/s 56

Exceptions:
• Group insurance scheme
• Employee
Employee’s s State insurance scheme
• Fidelity Guarantee Scheme
Benefits under Business or
Profession
Deduction of Insurance premium expenses:
Section Nature of expense
30 Insurance against damage and destruction of
the premises
31 Insurance against risk of damage and
destruction of machinery, plant and furniture
36(1)(i) Premium paid for insurance of stock,
stock stores
36(1)(ia) Allowed only to Federal Milk Co-operative
Society for insurance on lives of Cattle
36(1)(ib) Health insurance policy taken on the health of
employees is allowed as deduction
Provisions of adhoc deduction from
commission income to LIC agents
• Circular no. 594 dt. 27/02/91, 648 dt. 30/03/93 and
677 dt.
dt 28/01/94 provides adhoc deduction from
commission income earned by LIC agents, UTI
agents, Post office/Government securities agents
and mutual funds agents.
• Commission earned is less than Rs. 60000/-:
Commission Adhoc Maximum
deduction deduction
First year’s Commission 50% of same Rs.20,000
Renewal Commission 15% of same
First year’s
year s commission 33 33% of First
33.33% Rs 20
Rs. 20,000
000
and renewal commission year’s and renewal
are not separable commission
Bonus Commission NIL NIL
Insurance Receipts chargeable as
Capital Gains
Under section 45(1A)
• C
Compensation
ti received
i d on damage
d or destruction
d t ti off
i. a capital asset
ii. destruction is result of four circumstances:
(i) Fl
Flood,
d Typhoon,
T h H i
Hurricane, C l
Cyclone, E th
Earthquake
k or any
convulsion of nature.
(ii) Riot or civil disturbance
(iii) Accidental fire explosion
(i ) Action
(iv) A ti b an enemy or to
by t combating
b ti an enemy
• Profits and gains arising from such receipts will be
chargeable under the head of Capital Gains.
• Taxable in the year in which such money or assets received.
• Sale consideration when assets received: FMV of other
assets received ((on the date of receipt).
p)
Benefits to Insurance Providers

Under section 10(23BBE):


Income of Insurance Regulatory and Development
authority is exempt from Tax.

Under section 10(25A):


Income of Employee’s State Insurance Fund set up
under the provision of Employee's State Insurance
A t 1948 is
Act, i exemptt from
f T
Tax.

Under section10(23AAB):
Any income of a fund set up by LIC of India on or
after 1st August, 1996 or any other insurer approved
by Controller of IRDA is exempt from Income Tax.
TDS on Insurance companies

• No TDS is required to be deducted


¾ U/s 193 for Interest on Securities
¾ U/s 194 for Dividend
¾ U/s 194A for Interest other than interest on securities

in case of investments made by


i. Life Insurance corporation
p
ii. General Insurance Corporation of India
iii. Four companies formed under General insurance
Business Act,
Act 1972
iv. Any other insurer
TDS on Insurance Commission

Under section 194D:


• Person responsible to deduct tax is the person who is
responsible for paying to a resident any income by way of
remuneration, reward, commission for soliciting and
procuring insurance business including renewal of same.
• Applicable rate: 10% (No surcharge or EC, SHEC)
• If recipient does not furnish PAN then TDS Rate will be @
20% w.e.f. 1st April 2010.
• Time for deduction: Credit to account or payment of same
(by any mode), whichever is earlier.
• Threshold limit: Rs. 5,000/-.
• N TDS if NIL deduction
No d d ti certificate
tifi t furnished.
f i h d
• Lower rate deduction as per section 197
• Certificate in form no.16A.
Taxation aspect on Banking
• Taxability of Interest Income of deposits.
• Allowability
ll bl off Interest expenditure
d incurred
d
• Deduction of Interest for Housing loan
• Deduction of Interest under Business and profession
• Deduction
d ffrom the
h Gross
G totall Income
• Benefits to Banking companies
• Deduction for Provision for Bad Debts
• Deduction for transfer to special reserve
• Deduction from Gross Total Income
Interest Income
• Taxable under the head “Income from other
sources” due to its residuary nature u/s 56(1)
• If interest earned from money lending or investment
business, taxable under head of “Profits and gains
from business or profession
profession”.
• Interest Income may arise from
ƒ Saving bank a/c
ƒ Monthly income scheme
ƒ Recurring deposits
ƒ Fixed Deposits
ƒ Any loan or advances
Exempted Interest Incomes
Under section 10(4)
• IIn case off a non-resident
id t individual,
i di id l any income
i b
by
way of interest on moneys standing to his credit on
Non-resident (External) Account in any bank in India

Under section 10(15)


• Interest received by a non-resident or resident but
not ordinarily resident in India on deposit made after
31st March,
M h 2005 in i an offshore
ff h b ki
banking unit.
it
• Interest payable by a Scheduled bank to a Non-
resident and RNOR on deposits (approved by RBI) in
foreign currency.
• Interest payable by ICICI, IFCI, IDBI, EXIM Bank,
NHB, SIDBI or any money borrowed before 1st June,
2001 from sources outside India.
Housing loan Interest under the
head of House Property
• Interest on borrowed capital is allowable as deduction u/s
24(b).
24(b)
• Borrowing should be for purpose of purchase, construction,
repairs, renewals or reconstruction.
• For self
F lf occupied
i d property:
t
Interest on borrowed capital is deductible upto Rs.
150000/- if:
i. Capital
C it l borrowed
b d on or after
ft April
A il 1,
1 1999
ii. Loan is for acquiring or constructing a property
iii. The acquisition or construction has been completed within 3
years from end of financial year in which capital is borrowed.
years, borrowed
iv. Person extending loan certifies that such interest is payable.
If conditions not satisfied - interest deductible upto Rs.30,000/-
• For let out property: No limit
Deduction of Interest expenditure
under Business or Profession
• Conditions:
• The assessee must have borrowed money.
• The money so borrowed should be for the purpose of
business.
• Interest is paid or payable on such borrowing.
• The loan can be taken from Banks/ Financial
Institutions or from unsecured sources.
• If above conditions are satisfied, interest will be
deductible on the basis of system of accounting
subject to section 43B and 40A(3).
Disallowance of unpaid liability
Section 43B has a general rule of certain expenditures
that are to be deducted on payment basis.
basis It includes:
•Interest on any loan or borrowing from a public
financial institution as ICICI Bank, IFCI, IDBI, LIC and
UTI or State financial corporation and State industrial
investment corporation
•Interest on any loan and advances taken from a
scheduled bank including a coco-operative
operative bank

Exception: If payment of said interest is actually made


on or before the due date of submission of return of
Income.
Section 40(A)(3)
• Assessee incurs an expenditure which is otherwise
deductible exceeding amount of Rs.
Rs 20,000.
20 000
• The payment (or aggregate of payment mad to a
person in a day) in respect of the above
expenditure exceeds Rs.
Rs 20,000/-.
20 000/-
• Payment is made otherwise than by an account
payee cheque or account payee draft (cash, bearer
cheque , etc).
• If above conditions are satisfied, then full
expenditure is not allowed as deduction.
Deduction from Gross Total Income
Under section 80C (maximum deduction Rs. 1 lac)
• Principal
P i i l repaymentt off lloan ttaken
k ffrom specified
ifi d
sources for construction/purchase of residential
property
• Amount deposited as term deposit for a period of 5
years or more in Scheduled bank
Under section 80E (Interest on education loan)
• Education loan has been taken from any bank or
financial institution by an individual.
• The loan has been taken for higher education.
• The loan was taken for himself, spouse or children
• Assessee has paid interest on such loan out of his
income chargeable to tax.
• Deduction available for first 8 years
Benefits to Banking Units

Provision for bad-debts expenses


• It is an allowable to rural branches of
Commercial Banks (Section 36(1)(viia))
Rural Branches means a Branch of any bank
situated in a place which has population of
not more than 10000 according to previous
census.
• Deduction under this section will be available
first before deduction of actual Bad debts u/s
36(1)(vii).
36(1)(vii)
Amount deductible in respect of
provision for Bad &Doubtful Debts
In case of In case of In case of
Scheduled PFI SFC
PFI, SFC, Foreign
bank & Non SIIC Bank
Scheduled
Bank
Total Income 7.5% of 5% of Such 5% of Such
(Before any Such Income Income Income
deduction under
chapter VI)
Aggregate 10% of Such
average advance Advances
made by Rural
Branches
Case Study
ABC, a financial institution bank, is eligible to claim the
deduction u/s 36(1)(viia).
36(1)(viia) Its total income (before claiming
this deduction is 160 lacs for the A.Y. 2010-11. PFDD has
opening balance of Rs. 1 lac. ABC wants to write off 14
lacs as bad debts. Work out deduction u/s
36(1)(vii)/(viia).
Provision for Bad and Doubtful Debt A/c (Rs. in lacs)
To Debtors 14 By Balance b/f 1
(Being bad debts written off) By Profit and Loss a/c 8
(deduction eligible u/s
36(1)(viia),
( )( ) i,e, 5% of 160 Lacs))
By Profit and loss a/c
(being deduction u/s 36(1)(vii) 5
14 14
Transfer to Special Reserve

1. Governed by Section 36(i)(viii)


2. Deduction is available to
i. ICICI, IFCI, IDBI, LIC, UTI, IDFCL, PFI notified by the
Central Government u/s 4A of Companies Act, 1956.
ii. A financial corporation established by Government.
iii. Government company u/s 617 of Companies Act
iv
iv. Banking Company
v. Co-Operative Bank
vi. A Housing finance company
vii. A
Any other
th financial
fi i l corporation
ti including
i l di a public
bli
company.
Transfer to Special Reserve
(contd..)
• They are engaged in business of providing long term
finance for following In India
i. Industrial development
ii. Agricultural development
iii
iii. Infrastructure development
iv. Construction and purchase of residential houses
• Amount of deduction – lowest of
i
i. Amount transferred to Special reserve
ii. 20% of profit derived from business activities
iii. 200% of (Paid up capital and general reserve as on
last day of previous year)
year)-(Special
(Special reserve balance as
on first day of the previous year)
• Withdrawal from special reserve is chargeable to tax
in the y
year in which the amount is withdrawn.
Deduction from Gross Total Income
Under section 80LA
• The assessee is
Th i
• A Scheduled bank having offshore banking unit in
a special economic zone.
• A foreign Bank having offshore banking unit in a
special economic zone.
• A unit of International financial service centre
• The gross total income includes income derived from
above units from the business of banking
• A report of Chartered Accountant in from no. 10CCF
certifying the deduction should be furnished with
return of income.
income
• Amount of deduction:
100% income deductible for five consecutive
assessment years and 50% for next five years.
Thank
a you…
you