Insurance - Accounting and Tax Aspects

Insurance – Certain Taxation and Accounting Insurance – Certain Taxation and Accounting AspectsAspects

“Unfortunately your Insurance Policy does not cover anesthesia, so weAre going to have to use low budget procedure to put you out”.

CA Sandesh Mundra, Chartered CA Sandesh Mundra, Chartered AccountantsAccountants

Synopsis of the PresentationSynopsis of the Presentation PART - IPART - I

Provisions in Income Tax Act, 1961 dealing with proceeds Provisions in Income Tax Act, 1961 dealing with proceeds received from LIP.received from LIP.

Relevance of Amendments made by Finance Act, 2003.Relevance of Amendments made by Finance Act, 2003. Proposals under the DTC dealing with Life InsuranceProposals under the DTC dealing with Life Insurance Other sections dealing with Insurance under the current actOther sections dealing with Insurance under the current act

PART – IIPART – II Life Insurance – Broad Scope of accounting as defined Life Insurance – Broad Scope of accounting as defined

under IFRS.under IFRS. Categorisation of Investments Categorisation of Investments Relevance of the standardRelevance of the standard Disclosure requirementsDisclosure requirements


S. 10(10D) of the ITA contains provisions relating S. 10(10D) of the ITA contains provisions relating to exemption of any amount received under life to exemption of any amount received under life insurance policy. insurance policy.

Prior to 2003 the provision was as under:-Prior to 2003 the provision was as under:-

Any sum received under a life insurance policy, Any sum received under a life insurance policy, including the sum allocatedby way of bonus on including the sum allocatedby way of bonus on such policy other than any sum received under such policy other than any sum received under subsection(3) of section 80DDA or under a subsection(3) of section 80DDA or under a Keyman insurance policy.Keyman insurance policy.


As can be seen, any amount received under the life insurance As can be seen, any amount received under the life insurance policy, were exempt. With the relaxation of licensing policy of policy, were exempt. With the relaxation of licensing policy of the Government of India, private sector was also permitted to the Government of India, private sector was also permitted to operate therein.operate therein.

With large numbers of companies were permitted to carryWith large numbers of companies were permitted to carry

business of life insurance; the competition is bound to be business of life insurance; the competition is bound to be fierce. In order to capturemarket, and lure the high net-worth fierce. In order to capturemarket, and lure the high net-worth individuals (HNI), insurance products were structured individuals (HNI), insurance products were structured leveraging the provisions of S. 10(10D). The insurance leveraging the provisions of S. 10(10D). The insurance policies structured were becoming more of financial products policies structured were becoming more of financial products and less of insurance as such. and less of insurance as such.


The development came to the notice of the The development came to the notice of the Government. The Finance Bill 2003, with Government. The Finance Bill 2003, with effect from assessment year 2004-05, replaced effect from assessment year 2004-05, replaced the erstwhile S. 10(10D) with a totally new the erstwhile S. 10(10D) with a totally new one and made certain amendments in S. 88 i.e. one and made certain amendments in S. 88 i.e. relating to deduction from gross total income. relating to deduction from gross total income.


Newly inserted section 10(10D) which is Newly inserted section 10(10D) which is applicable today reads as follow:applicable today reads as follow:

(10D) any sum received under a life insurance policy, (10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such including the sum allocated by way of bonus on such policy, other than—policy, other than—

any sum received under sub-section (3) of section 80DD or any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; orsub-section (3) of section 80DDA; or

any sum received under a Keyman insurance policy; orany sum received under a Keyman insurance policy; or

any sum received under an insurance policy issued on or any sum received under an insurance policy issued on or after the 1st day of April, 2003 in respect of which the after the 1st day of April, 2003 in respect of which the premium payable for any of the years during the term of premium payable for any of the years during the term of the policy exceeds twenty per cent the policy exceeds twenty per cent of the actual capital sum assured:of the actual capital sum assured:


Provided Provided that the provisions of this sub-clause shall that the provisions of this sub-clause shall not apply to any sum received on the death of a person:not apply to any sum received on the death of a person:

Provided further Provided further that for the purpose of calculating that for the purpose of calculating the actual capital sum assured under this sub-clause, the actual capital sum assured under this sub-clause, effect shall be given to the Explanation to effect shall be given to the Explanation to

sub-section (2A) of section 88.sub-section (2A) of section 88.


Proviso – Proviso –

In case of death of a person - exemption to continue…In case of death of a person - exemption to continue…

Thus following continued to enjoy the exemption :-Thus following continued to enjoy the exemption :-

a. Life Insurance policies which were issued before 1-4-a. Life Insurance policies which were issued before 1-4-2003 irrespective of the amount of the premium 2003 irrespective of the amount of the premium payable with respect to the capital sum assured.payable with respect to the capital sum assured.

b. Policies wherein the premium payable was less than b. Policies wherein the premium payable was less than 20.00% of the capital sum assured.20.00% of the capital sum assured.


Justification for the amendments?Justification for the amendments?

The insurance policies with high premium and The insurance policies with high premium and minimum risk cover are similar to deposits or bonds. minimum risk cover are similar to deposits or bonds. With a view to ensure that such insurance policies are With a view to ensure that such insurance policies are treated at par with other investment schemes, it is treated at par with other investment schemes, it is proposed to rationalise the tax concessions available proposed to rationalise the tax concessions available to such policies. to such policies.

The objectives of S. 10(10D) were made known to the The objectives of S. 10(10D) were made known to the tax payers i.e. exemption is available for insurance tax payers i.e. exemption is available for insurance and not earning interest or capital appreciation.and not earning interest or capital appreciation.


Further deduction from income is presently Further deduction from income is presently available under Chapter VIavailable under Chapter VI

80C.80C. In computing the total income of an assessee, In computing the total income of an assessee, (individual or a Hindu undivided family), there shall (individual or a Hindu undivided family), there shall be deducted, the whole of the amount paid or be deducted, the whole of the amount paid or deposited in the previous year, being the aggregate of deposited in the previous year, being the aggregate of the sums referred to in sub-section (2), as does not the sums referred to in sub-section (2), as does not exceed one lakh rupees.exceed one lakh rupees.

((ii) to effect or to keep in force an insurance on the life ) to effect or to keep in force an insurance on the life of persons specified in sub-section (4);of persons specified in sub-section (4);


(3) The provisions of sub-section (2) shall apply only to so (3) The provisions of sub-section (2) shall apply only to so much of any premium or other payment made on an insurance much of any premium or other payment made on an insurance policy other than a contract for a deferred annuity as is not in policy other than a contract for a deferred annuity as is not in excess of twenty per cent of the actual capital sum assured.excess of twenty per cent of the actual capital sum assured.

Explanation.Explanation.In calculating any such actual capital sum In calculating any such actual capital sum assured, no account shall be takenassured, no account shall be taken

((ii) of the value of any premiums agreed to be returned, or) of the value of any premiums agreed to be returned, or ((iiii) of any benefit by way of bonus or otherwise over and ) of any benefit by way of bonus or otherwise over and

above the sum actually assured.above the sum actually assured.


Persons on whose behalf payments Persons on whose behalf payments can be made……..can be made……..

4) The persons referred to in sub-section (2) shall be the 4) The persons referred to in sub-section (2) shall be the following, namely:following, namely:

((ii) in the case of an individual, the individual, the wife or ) in the case of an individual, the individual, the wife or husband and any child of such individual, andhusband and any child of such individual, and

((iiii) in the case of a Hindu undivided family, any member thereof;) in the case of a Hindu undivided family, any member thereof;


(5) Where, in any previous year, an assessee:-(5) Where, in any previous year, an assessee:-

((ii) terminates his contract of insurance by notice to that ) terminates his contract of insurance by notice to that effect or where the contract ceases to be in force by effect or where the contract ceases to be in force by reason of failure to pay any premium, by not reviving reason of failure to pay any premium, by not reviving contract of insurance,contract of insurance,

((aa) in case of any single premium policy, within two years after the date of ) in case of any single premium policy, within two years after the date of commencement of insurance; orcommencement of insurance; or

((bb) in any other case, before premiums have been paid for two years; or) in any other case, before premiums have been paid for two years; or

((iiii) terminates his participation in any unit-linked ) terminates his participation in any unit-linked insurance plan by notice to that effect or by reason of insurance plan by notice to that effect or by reason of failure to pay any contribution, before contributions failure to pay any contribution, before contributions in respect of such participation have been paid for in respect of such participation have been paid for five years; five years;


((aa) no deduction shall be allowed to the assessee with ) no deduction shall be allowed to the assessee with reference to any of the sums, paid in such previous reference to any of the sums, paid in such previous year; andyear; and

((bb) the aggregate amount of the deductions of income ) the aggregate amount of the deductions of income so allowed in respect of the previous year or years so allowed in respect of the previous year or years preceding such previous year, shall be deemed to be preceding such previous year, shall be deemed to be the income of the assessee of such previous year and the income of the assessee of such previous year and shall be liable to tax in the assessment year relevant shall be liable to tax in the assessment year relevant to such previous year.to such previous year.


(8) In this section,(8) In this section,

((iiii) contribution to any fund shall not include any sums in ) contribution to any fund shall not include any sums in repayment of loan;repayment of loan;

((iiiiii) insurance shall include:-) insurance shall include:-((aa) a policy of insurance on the life of an ) a policy of insurance on the life of an

individualindividualspousespousechild of such individualchild of such individualmember of a Hindu undivided family member of a Hindu undivided family

((bb) a policy of insurance for the benefit of a minor with the object ) a policy of insurance for the benefit of a minor with the object of enabling the minor, after he has attained majority to secure of enabling the minor, after he has attained majority to secure insurance on his own life by adopting the policy and on his insurance on his own life by adopting the policy and on his being alive on a date (after such adoption) specified in the being alive on a date (after such adoption) specified in the policy in this behalf;policy in this behalf;


An accountant, a lawyer, and an actuary are walking down the An accountant, a lawyer, and an actuary are walking down the street when they come upon a man who has just accidently street when they come upon a man who has just accidently dropped a number of coins out of his pocket onto the sidewalk.dropped a number of coins out of his pocket onto the sidewalk.

The accountant glances around at the coins, totals their value, The accountant glances around at the coins, totals their value, and advises the man on how much he lost.and advises the man on how much he lost.The lawyer ignores the coins and starts searching the sidewalk The lawyer ignores the coins and starts searching the sidewalk for dollar bills.for dollar bills.And the actuary uses the total value of the lost coins to project And the actuary uses the total value of the lost coins to project what's left in the guy's pocket. what's left in the guy's pocket.

SMILE ………


Proposals under DTC:Proposals under DTC:S. 56(2)(f) of DTC provides for inclusion of the entire S. 56(2)(f) of DTC provides for inclusion of the entire

amount received under the head “Income for amount received under the head “Income for Residuary Sources” (IRS). Residuary Sources” (IRS).

The section reads as follow:The section reads as follow:(f) any sum received under a life insurance policy, (f) any sum received under a life insurance policy,

including the sum allocated by way of bonus on such including the sum allocated by way of bonus on such policy;policy;

However, S. 57 providing for deduction from IRS However, S. 57 providing for deduction from IRS includes a clause permitting deduction of certain type includes a clause permitting deduction of certain type of amount in this respect. Sub-clause (3) reads as of amount in this respect. Sub-clause (3) reads as follow:follow:


(3) The amount of deduction referred to in clause (b) of (3) The amount of deduction referred to in clause (b) of sub-section (1) shall be the following -sub-section (1) shall be the following -

(a) any sum received under a life insurance policy, (a) any sum received under a life insurance policy, including the sum allocated by way of bonus on such including the sum allocated by way of bonus on such policy, if -policy, if -

(i) the premium payable for any of the years during the (i) the premium payable for any of the years during the term of the policy does not exceed five per cent of the term of the policy does not exceed five per cent of the actual capital sum assured; andactual capital sum assured; and

(ii) the sum is received only upon completion of the (ii) the sum is received only upon completion of the original period of contract of the insurance or upon original period of contract of the insurance or upon the death of the insured;the death of the insured;


A typical nature of the insurance policy is that A typical nature of the insurance policy is that they are of longer duration, at times, running they are of longer duration, at times, running into 20 or more years. Therefore, there will be into 20 or more years. Therefore, there will be cases wherein the provisions of DTC will be cases wherein the provisions of DTC will be applicable to the policies taken prior to 1-4-applicable to the policies taken prior to 1-4-2003 as well. Let us examine various 2003 as well. Let us examine various dimensionsdimensions


First…….First…….

First dimension is the time frame during which First dimension is the time frame during which the policies were taken. We have threethe policies were taken. We have three

scenarios viz.scenarios viz. (i) policies taken prior to 1-4-2003,(i) policies taken prior to 1-4-2003, (ii) policies taken between 1-4-2003 and 31-3-(ii) policies taken between 1-4-2003 and 31-3-

2011; and2011; and (iii) policies taken after 1-4-2011.(iii) policies taken after 1-4-2011.


Second …..Second …..

Second dimension is with respect to premium payable Second dimension is with respect to premium payable and sum assured. There are three cases viz.and sum assured. There are three cases viz.

(i) policies where the premium is equal to or less than (i) policies where the premium is equal to or less than 5.00% of the sum assured5.00% of the sum assured

(ii) policies where the premium is equal more than (ii) policies where the premium is equal more than 5.00% but less than 20.00% of the sum assured ; and5.00% but less than 20.00% of the sum assured ; and

(iii) policies where the premium is equal to or less (iii) policies where the premium is equal to or less than 5.00% of the sum assured and issued after 1-4-than 5.00% of the sum assured and issued after 1-4-2011 i.e. under DTC2011 i.e. under DTC


Third ….Third …. The third dimension is with reference to the The third dimension is with reference to the

circumstances under which the amount of life circumstances under which the amount of life insurance policies is received. Both ITA and DTC, insurance policies is received. Both ITA and DTC, provides for certain exemptions.provides for certain exemptions.

The three cases covered from examination are as The three cases covered from examination are as follow:follow:

(i) policy amount received upon completion of the (i) policy amount received upon completion of the original period of contractoriginal period of contract

(ii) policy amount received upon the death of the (ii) policy amount received upon the death of the insured; andinsured; and

(iii) Pre-mature Withdrawal(iii) Pre-mature Withdrawal


Policy Policy taken taken during the during the periodperiod

Type of Policy – Amount of Premium Type of Policy – Amount of Premium with reference to capital sum assuredwith reference to capital sum assured

upon upon completion of completion of the original the original period of period of contractcontract

upon the upon the death of the death of the insuredinsured

Pre-mature Pre-mature withdrawalwithdrawal

Prior Prior ••less than 5.00 % less than 5.00 % Exempt Exempt Exempt Exempt Taxable Taxable

ToTo

••More than 5.00 % but less than More than 5.00 % but less than 20.00% 20.00% Taxable Taxable Exempt Exempt Taxable Taxable

1-4-20031-4-2003 ••More than 20.00% More than 20.00% Taxable Taxable Exempt Exempt Taxable Taxable

1-4-20031-4-2003 ••less than 5.00 % less than 5.00 % Exempt Exempt Exempt Exempt Taxable Taxable

ToTo


31-03-201131-03-2011 ••More than 20.00% More than 20.00% Taxable Taxable Exempt Exempt Taxable Taxable

1-4-20111-4-2011 ••less than 5.00 % less than 5.00 % Exempt Exempt Exempt Exempt Taxable Taxable

onwardsonwards


••More than 20.00% More than 20.00% Taxable Taxable Exempt Exempt Taxable Taxable CA Sandesh Mundra, Chartered CA Sandesh Mundra, Chartered

AccountantsAccountants

Synopsis of the Proposed EET Regime :-Synopsis of the Proposed EET Regime :-

Maturity Proceeds of a policy shall be exempt only if the Maturity Proceeds of a policy shall be exempt only if the premium does not exceed 5% of Capital sum assured. Even premium does not exceed 5% of Capital sum assured. Even when 20% criteria was introduced it was policies taken after 1-when 20% criteria was introduced it was policies taken after 1-4-2003.No similar provisions in DTC. Thus all policies 4-2003.No similar provisions in DTC. Thus all policies covered as of now.covered as of now.Further irrespective of the fact whether any deductions have Further irrespective of the fact whether any deductions have been claimed, the proceeds would be made taxable.been claimed, the proceeds would be made taxable.Even capital contribution shall be chargedEven capital contribution shall be chargedThus all existing ULIP’s, Money back & Gauranteed Return Thus all existing ULIP’s, Money back & Gauranteed Return plans of insurance will take a hit.plans of insurance will take a hit.Even a loan received by the policy holder against the value of Even a loan received by the policy holder against the value of his policy or any surrender value received for a policy will his policy or any surrender value received for a policy will also get taxed on income.also get taxed on income.


Despite all this we feel the provisions were not Despite all this we feel the provisions were not brought as it is, but to solve a lot of problems, what brought as it is, but to solve a lot of problems, what

could those be:-could those be:-

““The Economic Times” of 21st June, 2009. The Economic Times” of 21st June, 2009. The I-T department is baffled by the new trend of huge The I-T department is baffled by the new trend of huge

amounts of cash being used to buy financial products amounts of cash being used to buy financial products which they suspect is black money. which they suspect is black money.

Tax officials have investigated a number of cases in Tax officials have investigated a number of cases in which investors have bought insurance policies by which investors have bought insurance policies by paying cash up to Rs 1 crore, forcing the department paying cash up to Rs 1 crore, forcing the department to re-examine many assessees with income of up to to re-examine many assessees with income of up to Rs 5 crore per annum, an official in Central Board of Rs 5 crore per annum, an official in Central Board of Direct Taxes (CBDT), who did not wish his name to Direct Taxes (CBDT), who did not wish his name to be disclosed, said.be disclosed, said.


The department is now investigating a case of a husband The department is now investigating a case of a husband and wife duo in one of the metro regions using cash and wife duo in one of the metro regions using cash to buy an LIC policy worth Rs 1.1 crore. to buy an LIC policy worth Rs 1.1 crore.

Similarly, it’s also examining two cases in which Similarly, it’s also examining two cases in which insurance products worth Rs 44 lakh and Rs 38 lakh insurance products worth Rs 44 lakh and Rs 38 lakh were bought using cash in Karnataka, the official were bought using cash in Karnataka, the official said. said.

The I-T department normally investigates most of the The I-T department normally investigates most of the returns filed by those earning above Rs 1 crore returns filed by those earning above Rs 1 crore annually. However, several cases in the Rs 1-5 crore annually. However, several cases in the Rs 1-5 crore annual earnings bracket escape scrutiny. annual earnings bracket escape scrutiny.


High Yield Returns?High Yield Returns? Even in the case of high-premium policies, the Even in the case of high-premium policies, the

objective was to get tax free income rather than objective was to get tax free income rather than insurance. Provisions regarding premium permitted insurance. Provisions regarding premium permitted being less than 20.00% of the sum assured are in the being less than 20.00% of the sum assured are in the statute since 1-4-2003. statute since 1-4-2003.

As we all know, the Assessing Officers have never As we all know, the Assessing Officers have never looked into it seriously. Any amount shown as looked into it seriously. Any amount shown as received under a life insurance policy is considered as received under a life insurance policy is considered as exempt by default. It is forgotten that the provision of exempt by default. It is forgotten that the provision of S. 10(10D) are with the riders.S. 10(10D) are with the riders.


Relevance of 5.00% / 20.00%Relevance of 5.00% / 20.00%For a layman, all these may sound confusing. Why For a layman, all these may sound confusing. Why

should the Government lay down the limit at 20.00% should the Government lay down the limit at 20.00% or at 5.00%? Why not any other figures? We have or at 5.00%? Why not any other figures? We have seen the reasons for laying down the limit of 20.00% seen the reasons for laying down the limit of 20.00% of the capital sum assured. Although, not so stated of the capital sum assured. Although, not so stated specifically in the Finance Bill 2003 or even in DTC, specifically in the Finance Bill 2003 or even in DTC,

the intention is to exempt the amount received under the the intention is to exempt the amount received under the insurance policy, and not any other amount. Except in insurance policy, and not any other amount. Except in the case of Term Insurance plan, when a person the case of Term Insurance plan, when a person makes payment of insurance premium it consists of makes payment of insurance premium it consists of two parts viz. cost of insurance and investment with two parts viz. cost of insurance and investment with the insurance company.the insurance company.


For e.g. the rate of premium is at Rs. 6.77 per Rs. 1,000 of sum For e.g. the rate of premium is at Rs. 6.77 per Rs. 1,000 of sum assured. This works out to approximately 0.7% of the sum assured. This works out to approximately 0.7% of the sum assured. Thus, keeping margin of around 4.93 % for with – assured. Thus, keeping margin of around 4.93 % for with – profit policies, wherein some amount is also returned by the profit policies, wherein some amount is also returned by the insurance company to the policy holders, the bench-mark of insurance company to the policy holders, the bench-mark of 5.00% must have been arrived at. Whether it is sufficient 5.00% must have been arrived at. Whether it is sufficient enough to cover majority of the cases of low income group is a enough to cover majority of the cases of low income group is a matter of debate. matter of debate.

The only question that one finds difficult to digest is climb-The only question that one finds difficult to digest is climb-down by the Government from 20.00% to 5.00% of the sum down by the Government from 20.00% to 5.00% of the sum assured.assured.

In all one can say that the idea is to promote pure term In all one can say that the idea is to promote pure term assurance plan and the policies wherein very low rate of return assurance plan and the policies wherein very low rate of return is assured by the insurance company. For rest of the policies, is assured by the insurance company. For rest of the policies, are proposed to be termed as financial asset and tax the amount are proposed to be termed as financial asset and tax the amount received as income.received as income.


Let us take the case of a person who has taken policy of 15 years Let us take the case of a person who has taken policy of 15 years duration and premium is more than 5.00% of the sum assured duration and premium is more than 5.00% of the sum assured prior to 1-4-2003. Since at that time such provisions were not prior to 1-4-2003. Since at that time such provisions were not there he will be in serious problem as the entire amount there he will be in serious problem as the entire amount received will be taxable. In the case of policies taken during received will be taxable. In the case of policies taken during the period 1-4-2003 to 31-3-2011, and having rate of premium the period 1-4-2003 to 31-3-2011, and having rate of premium more than 5.00% but less than 20.00% of the capital sum more than 5.00% but less than 20.00% of the capital sum assured, will also be facing problems.assured, will also be facing problems.

These are the cases wherein the taxpayers have operated within These are the cases wherein the taxpayers have operated within the declared policy and the statutory provisions prevailing at the declared policy and the statutory provisions prevailing at the relevant point of time. There can, certainly no element of the relevant point of time. There can, certainly no element of equity in putting them to hardship. One should not shed tears equity in putting them to hardship. One should not shed tears for those who have defied the provisions of the ITA as for those who have defied the provisions of the ITA as prevailing at the relevant point of time. For example, those prevailing at the relevant point of time. For example, those who have gone for the policies wherein the rate of premium is who have gone for the policies wherein the rate of premium is more than 20.00% for the capital sum assured have to blame more than 20.00% for the capital sum assured have to blame themselves for their ignorance of law and greed. They do not themselves for their ignorance of law and greed. They do not have any ground to complain.have any ground to complain.


What is the way out?What is the way out?

Blanket exemption is certainly out of question as it will give undue advantage to thoseBlanket exemption is certainly out of question as it will give undue advantage to thosewho have placed their money for laundering. It will also not be fair to salaried andwho have placed their money for laundering. It will also not be fair to salaried andmiddle class tax payers who are required to pay tax even on interest income earned ofmiddle class tax payers who are required to pay tax even on interest income earned ofRs. 100. Certainly there cannot be case for providing HNI an opportunity for earningRs. 100. Certainly there cannot be case for providing HNI an opportunity for earningtax free income.tax free income.

1 A way out can be to modify the provisions in the following way.1 A way out can be to modify the provisions in the following way.

2 Firstly, the proposed provisions of DTC should be applicable only for those policies2 Firstly, the proposed provisions of DTC should be applicable only for those policieswhich have been taken after 1-8-2009.which have been taken after 1-8-2009.

3 Secondly, as far as policies prior to the said period are concerned, policies issued 3 Secondly, as far as policies prior to the said period are concerned, policies issued before 1-4-2003 should be made totally exempt. In the case of policies issued after before 1-4-2003 should be made totally exempt. In the case of policies issued after 1-4-2003 till 31-3-2011, exemption be granted for the cases wherein the premium 1-4-2003 till 31-3-2011, exemption be granted for the cases wherein the premium paid is less than 20.00% of the sum assured. Clauses in this respect should be with paid is less than 20.00% of the sum assured. Clauses in this respect should be with sun-set period of, say, 15 to 20 years. This will address to the demand of large sun-set period of, say, 15 to 20 years. This will address to the demand of large number of ordinary policy holders who have relied on the policy of the number of ordinary policy holders who have relied on the policy of the Government.Government.


Which types of policies DTC proposes to Which types of policies DTC proposes to exempt?exempt?

A question may arise in the mind of a common man A question may arise in the mind of a common man as to which type of policy he should opt for? The as to which type of policy he should opt for? The message conveyed is clear. The people should go for message conveyed is clear. The people should go for the policies wherein the element of insurance is high the policies wherein the element of insurance is high as compared to financial investment. For better return as compared to financial investment. For better return on investment, one will have to look at the financial on investment, one will have to look at the financial markets and various products made available thereatmarkets and various products made available thereat


Options for the Policy-holdersOptions for the Policy-holdersA time has come for all of us to take out old policy A time has come for all of us to take out old policy

papers and examine its terms and conditions. At the papers and examine its terms and conditions. At the time of buying the insurance plan we generally do not time of buying the insurance plan we generally do not bother about these issues. However, the time has bother about these issues. However, the time has come to review the whole issue a fresh and take long come to review the whole issue a fresh and take long term view of the situation emerging.term view of the situation emerging.

What should the policy-holders do? Should they go for What should the policy-holders do? Should they go for pre-mature payment for whatever surrender value is pre-mature payment for whatever surrender value is available? Or should they continue with the policies available? Or should they continue with the policies and pay the tax in future? It is difficult to generalize, and pay the tax in future? It is difficult to generalize, for solution to these questions depend upon one’s set for solution to these questions depend upon one’s set of circumstances. of circumstances.


For example, those who have invested for laundering unaccounted For example, those who have invested for laundering unaccounted money may find that, if the money is withdrawn at this stage even money may find that, if the money is withdrawn at this stage even after incurring losses, it will pose another problem. after incurring losses, it will pose another problem.

The debate on this issue has made the tax authorities at lower level The debate on this issue has made the tax authorities at lower level enlightened about the provisions under the ITA. Any receipt of enlightened about the provisions under the ITA. Any receipt of money under the insurance policy will prompt them to invoke the money under the insurance policy will prompt them to invoke the provisions of S. 10(10D). Not only that, since the time for re-provisions of S. 10(10D). Not only that, since the time for re-opening the cases has not gone too far, it may prompt them to opening the cases has not gone too far, it may prompt them to invoke the relevant provisions for source of investment.invoke the relevant provisions for source of investment.

In the case of assessees who have opted for it purely for high rate of In the case of assessees who have opted for it purely for high rate of return i.e. wherein the rate of premium is more than 20.00% of the return i.e. wherein the rate of premium is more than 20.00% of the capital sum assured, may have to work out the cost-benefit capital sum assured, may have to work out the cost-benefit analysis. Of course, the danger of paying tax on premium paid and analysis. Of course, the danger of paying tax on premium paid and additional amount received, if any, will always remain.additional amount received, if any, will always remain.


What's the difference between an insurance company actuary and a mafia actuary?Answer: An insurance company actuary can tell you how many people will die this year, a mafia actuary can name them.


For all those who have gone purely for For all those who have gone purely for insurance cover and premium paid is within insurance cover and premium paid is within the limit laid down, there is no cause for the limit laid down, there is no cause for worry.worry.


Conclusion:Conclusion:

On thing that can be said about the DTC proposal is that there On thing that can be said about the DTC proposal is that there is no question of giving blanket exemption to amount received is no question of giving blanket exemption to amount received under insurance plan forever. And certainly the DTC cannot under insurance plan forever. And certainly the DTC cannot be a party to the unaccounted money launderers nor can it hold be a party to the unaccounted money launderers nor can it hold the brief for HNI. Why should one shed tears for such the brief for HNI. Why should one shed tears for such individuals? However, as explained above, in the process of individuals? However, as explained above, in the process of conversion to new system, there are genuine cases which have conversion to new system, there are genuine cases which have got trapped for no fault of their own. Their grievances got trapped for no fault of their own. Their grievances certainly need to be addressed to.certainly need to be addressed to.


Other Provisions dealing with Other Provisions dealing with Insurance, not being dealt in detail:-Insurance, not being dealt in detail:-

Section 44Section 44 Insurance business.Insurance business. 44.44. Notwithstanding anything to the contrary contained in the Notwithstanding anything to the contrary contained in the

provisions of this Act relating to the computation of income provisions of this Act relating to the computation of income chargeable under the head “Interest on securities”, “Income chargeable under the head “Interest on securities”, “Income from house property”, “Capital gains” or “Income from other from house property”, “Capital gains” or “Income from other sources”, or in sources”, or in section 199section 199 or in or in sections 28sections 28 to to 2929[43B], the [43B], the profits and gains of any business of insurance, including any profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with a co-operative society, shall be computed in accordance with the rules contained in the First Schedule.the rules contained in the First Schedule.

First ScheduleFirst Schedule


Other deductions.Other deductions. 36. 36. (1) The deductions provided for in the following clauses (1) The deductions provided for in the following clauses

shall be allowed in respect of the matters dealt with therein, in shall be allowed in respect of the matters dealt with therein, in computing the income referred to in computing the income referred to in section 28 :-section 28 :-

((ii) the amount of any premium paid in respect of insurance ) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used against risk of damage or destruction of stocks or stores used for the purposes of the business or profession;for the purposes of the business or profession;

[([(iaia) the amount of any premium paid by a federal milk co-) the amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative raised by its members to such federal milk co-operative society;]society;]


[([(ibib) the amount of any premium [paid by any mode of ) the amount of any premium [paid by any mode of payment other than cash] by the assessee as an employer to payment other than cash] by the assessee as an employer to effect or to keep in force an insurance on the health of his effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by :-employees under a scheme framed in this behalf by :-

((AA) the General Insurance Corporation of India formed under ) the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Act, 1972 (57 of 1972) and approved by the Central Government; orGovernment; or

((BB) any other insurer and approved by the Insurance Regulatory ) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);]Authority Act, 1999 (41 of 1999);]


END OF PART - IEND OF PART - I

Thanks for a patient hearing,We shall now move onto Part 2CA Sandesh Mundra, Chartered CA Sandesh Mundra, Chartered



Accounting under IFRSInsurance Industry


IFRS 4 on Insurancee Contracts is intended to IFRS 4 on Insurancee Contracts is intended to cover not only the insurance companies as we cover not only the insurance companies as we know in the legal framework, but every entity know in the legal framework, but every entity which issues insurance contract.which issues insurance contract.


Overview of IFRS 4Overview of IFRS 4

Defines an insurance contract and distinguishes from an Defines an insurance contract and distinguishes from an investment contractinvestment contract

Requires IAS 39 to be applied to some pure investment contracts Requires IAS 39 to be applied to some pure investment contracts (but not to contracts with discretionary participation features)(but not to contracts with discretionary participation features)

Requires some embedded derivatives and some deposit Requires some embedded derivatives and some deposit components to be separated from insurance contractscomponents to be separated from insurance contracts

Requires a minimum liability adequacy test to be applied based Requires a minimum liability adequacy test to be applied based on current estimates of future cash flowson current estimates of future cash flows

IAS 39 applies to investments – no separate rules for insurersIAS 39 applies to investments – no separate rules for insurers


Out of scope (as specifically covered by other Out of scope (as specifically covered by other standard) :-standard) :- Employee benefit plansEmployee benefit plans Product Warranties and gaurantees issued by Product Warranties and gaurantees issued by

manufacturer, dealer or retailer.manufacturer, dealer or retailer. Contractul rights which are contingent with regard Contractul rights which are contingent with regard

to royalties / licenses.to royalties / licenses. Financial Gaurantees Financial Gaurantees


47

AgendaAgenda

Product classification

Accounting for investments


48

AgendaAgenda


Accounting for investments


49

Need for product classificationNeed for product classification

IFRS 4: Only standard on insurance contracts IFRS 4: Only standard on insurance contracts

Applies only to contracts that meet the definition of an Applies only to contracts that meet the definition of an

insurance contract insurance contract

Investment contracts not meeting this definition covered under IAS 39Investment contracts not meeting this definition covered under IAS 39

on `Financial Instruments: Recognition and Measurement’on `Financial Instruments: Recognition and Measurement’

Classification of products into insurance products or otherwise: Classification of products into insurance products or otherwise:

a a prerequisite prerequisite under IFRSunder IFRS


50

Definition of an insurance contractDefinition of an insurance contract Definition refers to traditional features of insurance contracts, Definition refers to traditional features of insurance contracts,

distinguishing them from financial contractsdistinguishing them from financial contracts

Definition:Definition:

““a contract under which one party (the insurer) accepts a contract under which one party (the insurer) accepts

significant insurance risk significant insurance risk from another party (the policyholder) from another party (the policyholder)

by agreeing to compensate the policyholder if a specified by agreeing to compensate the policyholder if a specified

uncertain future event uncertain future event (the insured event) adversely affects the (the insured event) adversely affects the

policyholder”policyholder”

Insurance risk is defined as a Insurance risk is defined as a transferred risk transferred risk other than other than financial riskfinancial risk


51

#1: Significant insurance risk#1: Significant insurance risk Quantitative guidance for assessing Quantitative guidance for assessing significancesignificance of insurance risk of insurance risk

not provided not provided

Contract is an insurance contract if it results in a significant Contract is an insurance contract if it results in a significant

additional paymentadditional payment

If in a contract, death benefit exceeds the amount payable on survival, the If in a contract, death benefit exceeds the amount payable on survival, the

contract is insurance contract unless the additional benefit is insignificant contract is insurance contract unless the additional benefit is insignificant

Significance is interpreted in relation to an individual contract; Significance is interpreted in relation to an individual contract;

except in a except in a portfolio of homogenous contractsportfolio of homogenous contracts


52

Some contracts do not transfer any insurance risk to the issuer Some contracts do not transfer any insurance risk to the issuer

at inception, although they do transfer insurance risk at a later at inception, although they do transfer insurance risk at a later

timetime

Account for as investment contract until transfer of the insurance riskAccount for as investment contract until transfer of the insurance risk

Once the insurance risk is transferred account for as insurance contractOnce the insurance risk is transferred account for as insurance contract

Example: a zero death benefit pension product Example: a zero death benefit pension product

An insurance contract remains as an insurance contract until all An insurance contract remains as an insurance contract until all

rights and obligations are extinguished or expirerights and obligations are extinguished or expire

#1: Significant insurance risk #1: Significant insurance risk (Contd.)(Contd.)


53

Uncertainty of the insured event can result from Uncertainty of the insured event can result from

uncertainty over:uncertainty over:

the occurrence of the event;the occurrence of the event;

the timing of the occurrence of the event; orthe timing of the occurrence of the event; or

the magnitude of the effect, if the event occurs the magnitude of the effect, if the event occurs

Insured event must be explicitly or implicitly Insured event must be explicitly or implicitly

describeddescribed

#2: Uncertain future event#2: Uncertain future event


54

#3: Transferred risks#3: Transferred risks

Refers to risks which were pre existing for the Refers to risks which were pre existing for the

policyholder at inception of the contractpolicyholder at inception of the contract Loss of future earnings for the insured, when the Loss of future earnings for the insured, when the

contract is terminated by the insured event, is not contract is terminated by the insured event, is not

insurance risk as the economic loss for the insured insurance risk as the economic loss for the insured

is not a transferred riskis not a transferred risk


55

#4: Financial risks#4: Financial risks Include the risk of a possible change in variables such Include the risk of a possible change in variables such

asas interest rateinterest rate

financial instrument pricefinancial instrument price

commodity price commodity price

foreign exchange rateforeign exchange rate

Financial risk products are not presently sold by Life Financial risk products are not presently sold by Life

Insurance Companies in IndiaInsurance Companies in India


Take a break …Take a break …

A lawyer, an accountant and an actuary are discussing the merits of having A lawyer, an accountant and an actuary are discussing the merits of having a mistress or a wife.a mistress or a wife.

The lawyer reckons it is better having a mistress, because the wife can take The lawyer reckons it is better having a mistress, because the wife can take everything if you should come to a divorce.everything if you should come to a divorce.

The accountant reckons it is definitely better having a wife, from a taxation The accountant reckons it is definitely better having a wife, from a taxation perspective.perspective.

The actuary reckons it is better having both, because when you are not The actuary reckons it is better having both, because when you are not with the wife, she would think that you are with the mistress, and when with the wife, she would think that you are with the mistress, and when you are not with the mistress, the mistress thinks you are with the wife, and you are not with the mistress, the mistress thinks you are with the wife, and that way, you can spend more time at the office.that way, you can spend more time at the office.


57

Definition of an insurance contractDefinition of an insurance contract

““a contract under which one party (the insurer) a contract under which one party (the insurer)

accepts accepts significant insurance risk significant insurance risk from another party from another party

(the policyholder) by agreeing to compensate the (the policyholder) by agreeing to compensate the

policyholder if a specified policyholder if a specified uncertain future event uncertain future event (the (the

insured event) adversely affects the policyholder”insured event) adversely affects the policyholder”

Insurance risk is defined as a Insurance risk is defined as a transferred risk transferred risk other than other than

financial riskfinancial risk


Protection vs investment - the Protection vs investment - the spectrum of lifespectrum of life productsproducts

Term assurance

Protection products

Savings / investment products

Permanent health

insurance

Whole life cover Endowments

Pensions and

annuities

Maximum investment

Insurance contract

(traditional IAS 39


59

Accounting of Insurance Accounting of Insurance contractscontracts

Contract componentsContract components

Significant insurance risk ?

Significant insurance risk ?

Insurance contract IFRS 4

Insurance contract IFRS 4

Unbundling ?Unbundling ?

Financial risk ?Financial risk ?Financial risk ?Financial risk ?

Investment contractInvestment contract

??????

YesYes

Account as per IAS 39: Fair value or amortised cost

Account as per IAS 39: Fair value or amortised cost

NoNo

YesYes


60

Unbundling of an insurance contractUnbundling of an insurance contractCan the insurer measure the

deposit component separately without considering the insurance component ?

Can the insurer measure the deposit component separately

without considering the insurance component ?

The insurer’s accounting policies require it to

recognize all obligations and rights arising from the

deposit component

The insurer’s accounting policies require it to

recognize all obligations and rights arising from the

deposit component

Unbundling prohibitedUnbundling prohibited

Unbundling permitted

but not required

Unbundling permitted

but not required

Unbundling requiredUnbundling required

NoNo

NoNo

YesYes

YesYes


61

Indicative contract classification: Indian Indicative contract classification: Indian contextcontext

Product portfolioProduct portfolio ClassificationClassification

Unit Linked life Unit Linked life Insurance contracts as IRDA mandates a Insurance contracts as IRDA mandates a minimum death cover of 5 times the minimum death cover of 5 times the premiumpremium

Unit Linked pensionUnit Linked pension Insurance or Investment contracts Insurance or Investment contracts depending on sum assured opteddepending on sum assured opted

Participating – non linked life & Participating – non linked life & endowment productsendowment products

Insurance or Investment contracts Insurance or Investment contracts depending on sum assured opteddepending on sum assured opted

Participating – endowment pensionParticipating – endowment pension Insurance or Investment contracts Insurance or Investment contracts depending on sum assured opteddepending on sum assured opted

Non participating: Term (retail & group), Non participating: Term (retail & group), Mortgage & Credit term and Health Mortgage & Credit term and Health products products

Insurance contractsInsurance contracts

Group Superannuation, Gratuity & Leave Group Superannuation, Gratuity & Leave encashment encashment

Investment contractsInvestment contractsCA Sandesh Mundra, Chartered CA Sandesh Mundra, Chartered


62

To unbundle or not? To unbundle or not? Transparency? Transparency?

Impact on top lineImpact on top line

No quantitative guidance on identification of significant No quantitative guidance on identification of significant

insurance risk insurance risk Open to individual judgment in identifying significance of insurance Open to individual judgment in identifying significance of insurance

risk risk

Internationally contracts where the risk cover exceeds the premium by Internationally contracts where the risk cover exceeds the premium by

over 5 -10% are classified as Insurance contractsover 5 -10% are classified as Insurance contracts

Implications for Insurance CompanyImplications for Insurance Company


63

AgendaAgenda


Accounting for Investments


64

InvestmentsInvestments

LinkedLinked Non Linked & ShareholdersNon Linked & Shareholders

Investment accounting – Indian contextInvestment accounting – Indian context

Valued at fair value;

unrealised gain/loss is

taken to Revenue account


unrealised gain/loss is

taken to Revenue account

Equity & Mutual Fund

Investment

Equity & Mutual Fund

Investment

Other Investments

including debt instruments

Other Investments

including debt instruments


Unrealised gain/ loss taken to

Balance Sheet


Unrealised gain/ loss taken to

Balance Sheet

Valued at amortised cost using simple interest rate

method

Valued at amortised cost using simple interest rate

method


65

Recognition and measurement of Investments under IFRS Recognition and measurement of Investments under IFRS

governed by IAS 39 - `Financial Instruments: Recognition and governed by IAS 39 - `Financial Instruments: Recognition and

Measurement’Measurement’

IAS 39 prescribes rules for:IAS 39 prescribes rules for:

Recognition (and de-recognition) of financial instrumentsRecognition (and de-recognition) of financial instruments

Measurement of various types of financial instruments in the financial Measurement of various types of financial instruments in the financial

statements, including derivative financial instrumentsstatements, including derivative financial instruments

Hedge accountingHedge accounting

Investment accounting – under Investment accounting – under IFRSIFRS


66

Recognition: only when entity becomes party to the contractual Recognition: only when entity becomes party to the contractual

provisions of the instrumentprovisions of the instrument

De-recognition: is appropriate if either one of these two criteria De-recognition: is appropriate if either one of these two criteria

is met:is met: Contractual rights to the cash flows of the financial asset have expired, Contractual rights to the cash flows of the financial asset have expired,

oror

The financial asset has been transferred and the transfer qualifies for The financial asset has been transferred and the transfer qualifies for

de-recognitionde-recognition

In Indian GAAP, presently there are no explicit guidelines on In Indian GAAP, presently there are no explicit guidelines on

the timing of recognition & de-recognition of investmentthe timing of recognition & de-recognition of investment

Recognition and De-recognitionRecognition and De-recognition


Lets laugh a bit ………..


IAS 39IAS 39/IFRS 4/IFRS 4 can disrupt the balance can disrupt the balance between assets & liabilitiesbetween assets & liabilities

Balance sheet insurance company

Held-to-maturity = amortised cost Traditional insurance contracts = net-premium method at prudentdiscount rate

≌ amortised cost

Loans and receivables = amortised cost

Unit-linked insurance contracts = market value of linked investments

Available-for-sale = fair value

Fair value through P&L = fair value


69

Fair value through Fair value through

profit and lossprofit and loss

Held-to-maturity assets Held-to-maturity assets

(HTM)(HTM)

Loans and Loans and

receivablesreceivables

Available for sale Available for sale financial assets financial assets

(AFS)(AFS)

I. I. Classification requirements:Classification requirements:

a. Held for trading a. Held for trading

(acquired for the purpose (acquired for the purpose

of short-term profit taking)of short-term profit taking)

a. Fixed or determinable a. Fixed or determinable

payments and fixed payments and fixed

maturity with intention to maturity with intention to

hold till maturityhold till maturity

a. Financial a. Financial

assets with fixed assets with fixed

or determinable or determinable

payments payments

Financial assets not Financial assets not classified in any of classified in any of the other categoriesthe other categories

b. Upon initial recognition, b. Upon initial recognition,

designated as fair value designated as fair value

through profit or lossthrough profit or loss

b. If the portfolio has been b. If the portfolio has been

tainted, then financial tainted, then financial

assets cannot be classified assets cannot be classified

as HTMas HTM

b. Not quoted in b. Not quoted in

an active marketan active market

II. II. Initial measurement (at the time of purchase): Initial measurement (at the time of purchase):

Fair valueFair value Fair value + acquisition costFair value + acquisition cost

Measurement of financial instrumentsMeasurement of financial instruments


70

Measurement of financial instruments Measurement of financial instruments (Contd..)(Contd..)

III. III. Subsequent measurement:Subsequent measurement:

Fair valueFair value At amortised cost using effective At amortised cost using effective

interest rate methodinterest rate method

Fair valueFair value

IV. IV. Recognition of gains / losses through change in fair value: Recognition of gains / losses through change in fair value:

Recognised in profit Recognised in profit

or loss accountor loss account

Not applicableNot applicable To be recognised in To be recognised in

the equity account (i.e. the equity account (i.e.

the reserves and not the reserves and not

through profit or loss through profit or loss

account)account)



Held-to-maturity Held-to-maturity

assetsassets

Loans and Loans and


Available for sale Available for sale

financial assetsfinancial assets


71

V. V. Impairment loss: Impairment loss:

Not applicable as any Not applicable as any gains/losses are already gains/losses are already recognised in the profit or recognised in the profit or loss accountloss account

Amount of loss: difference between the assets Amount of loss: difference between the assets carrying amount and the present value of carrying amount and the present value of estimated future cash flowsestimated future cash flows

Amount of loss: the Amount of loss: the difference between difference between the acquisition cost the acquisition cost and the current fair and the current fair valuevalue

Recognition: loss shall be recognised in the Recognition: loss shall be recognised in the profit or loss account and the carrying value of profit or loss account and the carrying value of the financial asset shall be accordingly the financial asset shall be accordingly reducedreduced

Recognition: the Recognition: the cumulative loss cumulative loss previously previously recognised shall be recognised shall be reduced from the reduced from the equity (reserves) equity (reserves) account and shall be account and shall be recognised in profit recognised in profit or loss accountor loss account



Held-to-maturity Held-to-maturity

assetsassets

Loans and Loans and


Available for sale Available for sale

financial assetsfinancial assets



72

Other aspects on measurement:

Amortisation basis

IFRS prescribes Effective interest method

Indian GAAP prescribes current simple interest

method

Transaction costs (related to acquisition /

issuance of investment)

IAS 39 prescribes the cost to be charged off to

the Revenue / Profit & Loss Account

Indian GAAP prescribes capitalisation of the

cost with the cost of investment



73

An investment cannot be classified into or out of fair value An investment cannot be classified into or out of fair value

through profit or loss category through profit or loss category

Reclassification between AFS & HTM categories is possible Reclassification between AFS & HTM categories is possible

Except if HTM portfolio is tainted Except if HTM portfolio is tainted

If significant amount is reclassified under AFS from HTM; the If significant amount is reclassified under AFS from HTM; the

remaining HTM investment has also to be reclassified into AFSremaining HTM investment has also to be reclassified into AFS

Re-classification of financial Re-classification of financial instrumentsinstruments


74

Alignment between IRDA regulations and requirements of IAS Alignment between IRDA regulations and requirements of IAS

39 39

Classification of investments in light of lack of experienceClassification of investments in light of lack of experience

Volatility in the revenue account if one classifies Investments Volatility in the revenue account if one classifies Investments

as Fair value through Profit & Loss as Fair value through Profit & Loss

Decision to classify investments either at fund, segment or at Decision to classify investments either at fund, segment or at

each security leveleach security level This could impact allocation of a single security across various funds This could impact allocation of a single security across various funds

having different classification categorieshaving different classification categories



75

Stringent tainting provisions: Stringent tainting provisions:

Companies would be forced to classify long term securities Companies would be forced to classify long term securities

as other than HTM category as other than HTM category

HTM securities will now be valued using effective HTM securities will now be valued using effective

interest method as against presently used simple interest method as against presently used simple

interest method, requiring necessary system changes interest method, requiring necessary system changes

System readiness in respect of accounting, valuation System readiness in respect of accounting, valuation

and providing other disclosure related informationand providing other disclosure related information



76


Insurance - Accounting and Tax Aspects

Economy & Finance

chartered

hindu undivided

ca sandesh

investmentsca

ifrsca sandesh

orany sum

investment

capital sum