Budget 2022 introduced a new tax benefit/deduction for parents/guardians of a disabled person. If the parent/legal guardian of a disabled person takes out a savings life insurance policy with the latter as the beneficiary, then under the new tax SOP the parent/legal guardian would be entitled to a deduction from gross pre-tax income under certain conditions. This tax benefit can also be claimed in cases where policy benefits/payments begin while the policy purchaser is still alive. It is proposed to add the new tax relief under Section 80DD of the Income Tax Act.
Former Section 80DD of the Income Tax Act 1961 permitted the deduction where the premium amount was paid by the policy proposer where it was a term plan where the disabled person as a beneficiary would receive the lump sum or annuity payment only in the event of death of the applicant (parent/guardian) of the policy.
Finance Minister Nirmala Sitharaman said in her speech on the 2022 Budget: “The parent or guardian of a person with a disability may take out insurance for such a person. Current law provides for a deduction to the parent or legal guardian only if the settlement or annuity upon the death of the subscriber, ie parent or legal guardian, is available to the permanently disabled person. There may be situations where permanently disabled dependents require pension payments or lump sum payments while their parents/guardians are alive. I therefore propose to allow the payment of the annuity and lump sum to dependents during the lifetime of the parent/guardian, ie when the parent/guardian reaches the age of 60.”
According to the 2022 budget memorandum:
The existing provision of Section 80DD provides, among other things, a deduction for an Indian resident individual or HUF for (a) expenses related to the medical treatment (including nursing), education and rehabilitation of a dependent who is a person with a disability; or (b) any amount paid to LIC or any other insurer or administrator or any particular entity in respect of any plan for the support of a disabled dependent.
2. Subparagraph (2) of the foregoing section provides that the deduction is only permissible where the payment of the annuity or lump sum is made in favor of the dependent in the event of the death of the person or member of HUF on whose behalf the program was subscribed .
3. Subsection (3) of the foregoing section provides that if the disabled dependent predeceases the individual or HUF member, the amount paid into such scheme shall be deemed to be the beneficiary’s income for the previous year in which that amount accrued to the beneficiary and is therefore taxable as income for the previous year.
4. In 2017 Written Petition No. 1107 Ravi Agrawal v. Union of India and Other, Judge AK Sikri noted that there could be harsh cases where disabled dependents are required to pay a pension or lump sum even while their parents are alive. Guardian. It was also noted that the Center can accommodate all aspects, including those where a disabled family member may require payment on an annuity or lump sum basis even while the parent or guardian is alive.
5. In order to eliminate this real hardship, it is therefore proposed to allow the deduction under the said section also during the lifetime, ie when the person or member of the HUF has reached the age of sixty or over, in whose name a subscription to the program has been taken out and the payment or deposit has been suspended. It is further proposed that the provisions of paragraph (3) should not apply to amounts received by the dependent before death as an annuity or lump sum subject to the condition set out in the proposed amendment. 6. This change comes into effect on April 1, 2023 and applies accordingly to the assessment year 2023-24 and the following assessment years.