SCHEDULE-XIV INSURANCE BUSINESS

Income Tax Bill, 2025

Introduction

Schedule-XIV of the Income Tax Bill, 2025, and First Schedule of the Income-tax Act, 1961, both deal with the taxation framework for insurance business in India. These Schedules lay down the principles for the computation of taxable profits for life insurance and other insurance businesses, including special provisions for non-resident insurers and interpretative clauses. As the insurance sector is highly regulated and operates under unique business models, the computation of taxable profits for insurance companies requires specialized rules that differ from those applicable to other businesses. The 2025 Bill seeks to update, clarify, and in some respects, modify the existing regime under the 1961 Act. This commentary provides a detailed analysis of each provision in Schedule-XIV, contrasts it with its counterpart in Schedule 01, and discusses the practical and legal implications of the changes.

Objective and Purpose

The primary purpose of these Schedules is to ensure that the profits and gains from insurance business are computed in a manner that reflects the true economic activity and complies with the regulatory environment governing insurers. The unique nature of insurance business-characterized by long-term contracts, actuarial valuations, and special reserves-necessitates a distinct approach. The legislative intent is to align tax computation with statutory accounting under the Insurance Act, 1938, and the Insurance Regulatory and Development Authority Act, 1999 (IRDAI Act), while preventing tax leakage and ensuring consistency in tax treatment across the sector. The 2025 Bill, through Schedule-XIV, aims to streamline, modernize, and clarify certain aspects of the computation, reflecting contemporary practices and addressing ambiguities in the older regime.

Detailed Analysis of Schedule-XIV of the Income Tax Bill, 2025 with First Schedule of the Income-tax Act, 1961

A. Life Insurance Business

1. Separate Computation of Life Insurance Profits

• Schedule-XIV of the Income Tax Bill, 2025: Mandates that profits and gains from life insurance business during the tax year must be computed separately from any other business.
• First Schedule of the Income-tax Act, 1961: Contains a similar provision, requiring separate computation for any person carrying on life insurance business at any time in the previous year.

Analysis: Both Schedules recognize the necessity of segregating life insurance business from other business activities due to the distinct nature of insurance accounting and regulatory requirements. The language in the 2025 Bill is more succinct and directly linked to the tax year, whereas the 1961 Act refers to the "previous year," reflecting the shift in terminology in the new tax regime. The substance remains unchanged, ensuring continuity and clarity.

2. Computation of Profits of Life Insurance Business

• Schedule-XIV of the Income Tax Bill, 2025:
  • Profits are the annual average of the surplus (or deficit) disclosed by actuarial valuation as per the Insurance Act, 1938, for the last inter-valuation period ending before the tax year, excluding earlier periods.
  • Any expenditure inadmissible u/s 34 is to be added back to such profits.
• First Schedule of the Income-tax Act, 1961:
  • Profits are taken as the annual average of the surplus (or deficit) from actuarial valuation under the Insurance Act, 1938, for the last inter-valuation period ending before the assessment year, excluding earlier periods.
  • Recent amendment (2024) adds that any expenditure inadmissible u/s 37 should be included in profits.

Analysis: The methodology for determining taxable profits in both Schedules is fundamentally identical, relying on actuarial valuations to recognize the unique nature of insurance liabilities and reserves. The 2025 Bill updates the cross-reference from "assessment year" to "tax year," aligning with the new tax code. Notably, the 2025 Bill refers to section 34 (general disallowance of certain expenditures), whereas the 1961 Act (as amended) references section 37 (general deduction). This may have substantive implications:

• Section 34 (2025 Bill): Likely covers a broader or slightly different set of disallowances than section 37 of the 1961 Act. The precise impact depends on the content of section 34 in the new Bill.
• Section 37 (1961 Act): Focuses on general deductions not covered elsewhere. The amendment in 2024 was intended to plug loopholes and ensure that inadmissible expenses are added back to profits for tax purposes.

The 2025 Bill consolidates this requirement in the main provision rather than as a proviso, potentially streamlining compliance and enforcement.

3. Adjustment of Tax Paid by Deduction at Source

• Schedule-XIV of the Income Tax Bill, 2025:
  • Where profits are assessed based on an annual average surplus from an inter-valuation period exceeding 12 months, credit for income-tax paid in the preceding tax year is not given as per section 386. Instead, credit is allowed for the annual average of income-tax paid by deduction at source from interest on securities or otherwise during such period.
• First Schedule of the Income-tax Act, 1961:
  • Analogous provision: No credit for income-tax paid in the previous year as per section 199; credit is given for the annual average of tax deducted at source on interest on securities or otherwise during the period.

Analysis: Both Schedules address the practical issue arising from the use of multi-year actuarial periods for determining taxable profits. Since profits for a given tax year may relate to several previous years, the Schedules prevent double credit for tax paid in earlier years and instead allow an averaged credit for tax deducted at source. The 2025 Bill updates the cross-reference to the new section (386), reflecting legislative renumbering.

B. Other Insurance Business

4. Computation of Profits and Gains of Other Insurance Business

• Schedule-XIV of the Income Tax Bill, 2025:
  • Profits are the profit before tax and appropriations as per the profit and loss account under the Insurance Act, 1938, IRDAI Act, or regulations, with the following adjustments:
    • (a) Add back inadmissible expenditure or allowances u/ss 28 to 54, including any provision for tax, dividend, reserve, or prescribed provision.
    • (b) Add or deduct gain/loss from realization of investments if not already accounted for in the P&L.
    • (c) Add back provision for diminution in investment value debited to P&L.
    • (d) Allow deduction for amount carried to reserve for unexpired risks as prescribed.
  • Amounts payable u/s 37, added under (a), are allowed as deduction in the tax year when actually paid.
• First Schedule of the Income-tax Act, 1961:
  • Profits are the profit before tax and appropriations as disclosed in the P&L under the Insurance Act, IRDAI Act, or regulations, with adjustments:
    • (a) Add back inadmissible expenditure u/ss 30 to 43B, including provisions for tax, dividend, reserve, or prescribed provision.
    • (b) Add/deduct gain/loss on realization of investments if not already reflected.
    • (b)(ii) Add back provision for diminution in investment value debited to P&L.
    • (c) Allow deduction for amount carried to reserve for unexpired risks as prescribed.
  • Proviso: Any sum payable u/s 43B, added back under (a), is allowed as deduction in the year actually paid.

Analysis: The computational framework is largely preserved in the 2025 Bill, with some differences in cross-references and structure:

• Cross-References: The 2025 Bill refers to sections 28 to 54 for inadmissible expenses, whereas the 1961 Act refers to sections 30 to 43B. This could be a structural change, possibly reflecting the reorganization of deduction provisions in the new Bill.
• Actual Payment Rule: Both Schedules allow deduction for certain sums only in the year of actual payment, aligning with the principle of recognizing expenditure on a cash basis for specific items (mirroring section 43B of the 1961 Act).
• Reserves for Unexpired Risks: Both Schedules allow deduction for amounts carried to reserves for unexpired risks, recognizing the need for insurers to set aside funds for future liabilities.
• Investment Gains/Losses and Diminution Provisions: Both Schedules ensure that unrealized gains/losses and provisions for diminution are appropriately adjusted for tax purposes, preventing manipulation of taxable profits through accounting provisions.

The differences are mostly in the numbering and expression, with the 2025 Bill aiming for greater clarity and alignment with the reorganized tax code. ---

C. Other Provisions

5. Profits and Gains of Non-Resident Persons

• Schedule-XIV of the Income Tax Bill, 2025:
  • For non-resident insurers operating through Indian branches, in the absence of reliable data, profits may be deemed to be the proportion of global income corresponding to the ratio of Indian premium income to total premium income.
  • Global income for life insurance is to be computed as per the Act for Indian operations.
• First Schedule of the Income-tax Act, 1961:
  • Similar provision: Profits of Indian branches of non-resident insurers may be deemed as the proportion of world income corresponding to the ratio of Indian premium income to total premium income.
  • World income for life insurance is to be computed as per the Act for Indian operations.

Analysis: Both Schedules provide a deemed profit mechanism for non-resident insurers, recognizing the practical difficulty in attributing precise profits to Indian operations in the absence of reliable data. The method is proportional, based on premium income, which is a reasonable proxy in the insurance context. The terminology is updated in the 2025 Bill ("global income" vs. "world income"), but the substance is unchanged.

6. Interpretation

• Schedule-XIV of the Income Tax Bill, 2025:
  • "Investments" includes securities, stocks, and shares.
  • "Life insurance business" is as defined in section 2(11) of the Insurance Act, 1938.
  • References to the Insurance Act, 1938, for LIC are to be construed as references to that Act or section 43 of the LIC Act, 1956.
• First Schedule of the Income-tax Act, 1961:
  • Similar definitions for "investments" and "life insurance business."
  • References to the Insurance Act in relation to LIC are to be read with section 43 of the LIC Act, 1956.
  • Additional interpretative clauses and rules omitted or streamlined in the 2025 Bill.

Analysis: The interpretative provisions are largely unchanged, ensuring continuity in the application of key definitions. The 2025 Bill streamlines the language and omits certain redundant rules, reflecting a modern drafting style.

Practical Implications

For Insurers:

• Continued reliance on actuarial valuations and statutory accounting ensures that tax computation is consistent with regulatory reporting, minimizing compliance burdens.
• Explicit add-back of inadmissible expenses under the new cross-referenced sections may affect the quantum of taxable profits, depending on the scope of sections 28-54 in the new Bill.
• The cash basis deduction for certain statutory liabilities (mirroring section 43B) prevents deferral of tax through unpaid liabilities, aligning tax treatment with cash flows.
• Clear rules for non-resident insurers provide certainty and reduce litigation.

For Tax Authorities:

• The updated cross-references and streamlined provisions may facilitate easier administration and enforcement.
• Potential for disputes may arise if the scope of inadmissible expenses under the new sections differs from the old regime.

For Policyholders and the Market:

• Stable and predictable tax rules for insurers contribute to the stability of the insurance sector, indirectly benefiting policyholders.
• No significant changes are likely to affect product pricing or claims, as the core computational methodology remains unchanged.

Comparative Analysis and Unique Features

1. Legislative Modernization:

The 2025 Bill updates terminology ("tax year" vs. "previous year"/"assessment year"), consolidates and clarifies cross-references, and streamlines language, reflecting a move towards a more modern, user-friendly tax code.

2. Scope of Disallowances:

The shift from sections 30-43B (1961 Act) to sections 28-54 (2025 Bill) for inadmissible expenses may broaden or alter the types of expenses that must be added back, depending on the drafting of the new sections. This could have material tax consequences and may require insurers to revisit their tax provisioning and compliance processes.

3. Integration with Regulatory Framework:

Both Schedules maintain close alignment with the Insurance Act, 1938, and the IRDAI Act, 1999, ensuring that tax rules are not in conflict with regulatory requirements. This is crucial for the insurance sector, where prudential norms and solvency considerations are paramount.

4. Treatment of Non-Resident Insurers:

The proportional attribution of profits based on premium income is a pragmatic solution to the attribution problem, and its retention in the 2025 Bill reflects legislative satisfaction with its operation.

5. Emphasis on Actual Payment:

Both Schedules emphasize that certain statutory liabilities (notably those akin to section 43B items) are deductible only on actual payment, preventing tax deferral strategies.

6. Omission of Redundant Rules:

The 2025 Bill omits certain interpretative sub-clauses and streamlines the structure, reflecting a trend towards legislative simplification.

Ambiguities and Potential Issues

1. Scope of Inadmissible Expenses:

The exact impact of referencing sections 28-54 (2025 Bill) instead of sections 30-43B (1961 Act) will depend on the detailed content of these sections. Insurers and tax professionals will need to carefully review the new provisions to ensure compliance.

2. Transition Issues:

Given the changes in cross-references and possible substantive differences, transitional provisions may be needed to address cases straddling the old and new regimes.

3. Interpretation of "Profit Before Tax and Appropriations":

While both Schedules refer to profit before tax and appropriations as per statutory accounts, differences in accounting standards or regulatory guidance could affect the computation of taxable profits.

4. Non-Resident Attribution Formula:

While the proportional method is pragmatic, it may not always reflect the true economic contribution of Indian operations, especially for insurers with complex global structures.

Conclusion

Schedule-XIV of the Income Tax Bill, 2025, largely preserves the substance of the existing regime under First Schedule of the Income-tax Act, 1961, while updating terminology, streamlining cross-references, and clarifying certain provisions. The core principles-separate computation for life insurance, reliance on actuarial valuations, adjustments for inadmissible expenses, treatment of investment gains/losses, and special rules for non-resident insurers-remain intact. The changes are evolutionary rather than revolutionary, aimed at modernizing the legislative framework and ensuring alignment with contemporary regulatory and business practices. Insurers, tax professionals, and regulators will need to familiarize themselves with the new cross-references and ensure that compliance processes are updated accordingly. Potential ambiguities, especially regarding the scope of inadmissible expenses and transitional issues, may require further clarification through rules or judicial interpretation.

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Full Text:

- SCHEDULE-XIV INSURANCE BUSINESS

Insurance business taxation: updated rules tie taxable profits to actuarial surplus and reorganized disallowance cross-references. Schedule-XIV requires separate computation of life insurance profits by annual averaging of actuarial surplus/deficit from the last inter-valuation period, with add-backs of inadmissible expenditures under the reorganized disallowance provisions; it updates crediting rules for tax paid during multi-year valuation periods, prescribes profit computation and specified add-backs and deductions for other insurance business (including treatment of investment gains/losses and reserves for unexpired risks), and provides a proportional premium-based deeming rule for non-resident insurers, while streamlining interpretative definitions.