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TAXABILITY OF INSURANCE COMPANY

TAXABILITY OF INSURANCE COMPANY

Insurance are of two types: – life insurance and non-life insurance. Method of preparation of accounts of such type of companies and rules governing such companies are been defined in Insurance act, 1938 or IRDA act, 1999. However, taxability of these type of entities are been explained in Income tax act, 1961.

As per section 2(24)(vii) any surplus accruing to life as well as general mutual insurance concerns will fall within the definition of word “income” and as such would be taxable as income from business. Section 44 expressly provides the profits and gains of any business of insurance including that carried on by a mutual insurance company or a cooperative society shall be computed not according to the provisions of the act for computation of income under various heads but according to the method prescribed in the rules contained in the first schedule to the act.

Section 115B provides for concessional rate of tax arising from profit and gain arising from life insurance business. As per the act, an assessee shall be liable to pay income tax on total income which includes profit or gain arising from life insurance business computes as per first schedule as follows: –

Sum of : – a. Amount of tax @ 12.5 % on income from life insurance business; and

1. Amount of tax with which the assesse would have been chargeable had the total income of the assesse been reduced by the amount of profit and gains from life insurance business.

MAT shall not be applicable on income referred in section 115B

Example: – A ltd. Company is engaged in the business of life insurance business. Its total income for the A.Y. 2015-16 is as follows: –

Other than business income                                          Rs. 5,00,000

Calculate Income tax?

Ans.   1. Tax on business income @ 12.5% = 10,00,000 * 12.5% =           Rs. 1,25,000

1. Tax on other than business income = 5,00,000 * 30% =                 Rs. 1,50,000

Rs. 2,75,000

Add: Cess @ 3%                                                                         Rs. 8,250

TOTAL TAX PAYABLE                                                                             Rs. 2,83,250

Rule 5 of the first schedule to the income tax act, 196a provides that the profit and gain of non-life insurance business would be the profit before tax and appropriations as disclosed in the profit and loss account prepared in accordance with the Insurance act, 1938 or the IRDA Act, 1999, after adjustment for unexpired risk and disallowances under section 30 to 43B. Any provision for diminution in the value of investment debited to profit and loss account has to be added back. Any gain or loss on realization of investments not  credited or debited to profit and loss account, shall be added or deducted, as the case may be.

TAXABILITY OF INSURANCE COMPANY

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