Keyman Insurance policy - Taxability proposed changes

Current provision: 

Sub-clause (d) to clause (10D) of Section 10 provided that any sum received under keyman life insurance policy would not be entitled for the exemption under section 10(10D). There was anomaly whether receipt of life insurance policy would be exempt or chargeable to tax in case such keyman life insurance policy is assigned to the keyman. However Delhi High Court in case of Rajan Nanda[1] has held that once there is assignment of keyman life insurance policy by a company / employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy and such person in whose favour insurance policy is assigned at the time of maturity can claim exemption u/s 10(10D).

Proposed amendment: 

It is proposed to amend the Explanation providing that keyman insurance policy on assignment to keyman, with or without consideration, would continue to remain key insurance and accordingly, any receipt from it would not be exempt.

Applicability: 

Amendment applies from 1-4-2014

Implication:

Any receipt on keyman life insurance policy post its assignment (with or without consideration) to the employee / keyman would be now chargeable to tax. Further receipt would be taxable even if amount is received by the family members on the death of keyman.

Though this amendment is prospective, it may have retrospective effect in the sense that it applies to existing policies too. Amended provisions would apply in respect of any keyman insurance policy whether taken before or after 1/4/2013. It would even apply to those life insurance policies which has assigned before 1/4/2013 and whose maturity falls on or after 1/4/2013. 

Issue would arise as under which head sums would be taxable? Whether such maturity proceeds would be taxable as salaries or business income or capital gain or income from other sources? Whether whole maturity proceeds would be taxable or maturity proceeds less consideration on transfer, if any, would be taxable. Whether any benefit in respect of premium paid by assignor would be available or not? Can assignee claim indexation benefit on consideration paid by him or paid by the assignor? What would be the implications if assignee is not the employee? Specific provision to rest above issues needs to be introduced. Otherwise change in tax treatment would invite undrawn litigation.

(extracts from the article published in the Chamber's Journal March 2013)

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[1] CIT vs. Rajan Nanda [2012] 18 taxmann.com 98 (Delhi)