Our company assigned its keyman policy to the director before maturity and he paid the surrender value. Is the maturity money still exempt in his hands?
No, not where the assignment falls in assessment year 2014-15 or later. The Board's explanatory notes to the Finance Act 2013 record that keyman policies were being assigned to the keyman before maturity so that the proceeds could be claimed exempt under s.10(10D), and state that the clause was amended so that a policy assigned during its term, with or without consideration, continues to be treated as a keyman insurance policy. The change applies from 1 April 2014, that is, for assessment year 2014-15 onwards.
Decided by the CBDT Circulars & Instructions (Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes) on 2014-01-24, reported as Circular No. 03/2014, F. No. 142/24/2013-TPL, dated 24 January 2014. It bears on section 10(10D) of the Income Tax Act 1961, in Capital Gains Exemptions and Salary & Perquisites matters.
This is the document that closes the assignment route, and it is also the document that tells you the route was open before it. A practitioner holding a policy assigned in an earlier year needs the effective-date paragraph as much as the amendment itself. The Board's own description of the practice - and its acknowledgment that the courts had noticed the gap - is also the department's answer when an officer tries to apply the amended definition to a pre-2014 assignment.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Clause (10D) of s.10 before the Finance Act 2013 exempted any sum received under a life insurance policy other than a keyman insurance policy. The Board records that policies taken as keyman insurance policies were being assigned to the keyman before maturity, and that exemption under s.10(10D) was then claimed on policies which had originally been keyman insurance policies but had been assigned to some other person during their term.
The Explanation to s.10(10D) was amended so that a keyman insurance policy assigned to any person during its term, with or without consideration, continues to be treated as a keyman insurance policy. The amendment takes effect from 1 April 2014 and applies from assessment year 2014-15 onwards.
The Board describes the amendment as plugging a loophole and checking practices adopted to avoid payment of taxes: the assignment was being used to strip the policy of its keyman character so that the maturity proceeds fell within the general exemption for life insurance receipts. The paragraphs summarised here are the Board's own explanation of the amendment, not a judicial construction of it.
With a view to plug the loophole and check such practices to avoid payment of taxes, the provisions of clause (10D) of section 10 of the Income-tax Act, 1961 have been amended to provide that a keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a keyman insurance policy.
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Handle my notice → Ask a CA on WhatsAppNo, not where the assignment falls in assessment year 2014-15 or later. The Board's explanatory notes to the Finance Act 2013 record that keyman policies were being assigned to the keyman before maturity so that the proceeds could be claimed exempt under s.10(10D), and state that the clause was amended so that a policy assigned during its term, with or without consideration, continues to be treated as a keyman insurance policy. The change applies from 1 April 2014, that is, for assessment year 2014-15 onwards. This was decided by the CBDT Circulars & Instructions (Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes) and bears on section 10(10D) of the Income Tax Act 1961. It is reported as Circular No. 03/2014, F. No. 142/24/2013-TPL, dated 24 January 2014. This is the document that closes the assignment route, and it is also the document that tells you the route was open before it. A practitioner holding a policy assigned in an earlier year needs the effective-date paragraph as much as the amendment itself. The Board's own description of the practice - and its acknowledgment that the courts had noticed the gap - is also the department's answer when an officer tries to apply the amended definition to a pre-2014 assignment. If it applies to you, the first step is this: Date the assignment endorsement on the policy and test it against assessment year 2014-15.
Clause (10D) of s.10 before the Finance Act 2013 exempted any sum received under a life insurance policy other than a keyman insurance policy. The Board records that policies taken as keyman insurance policies were being assigned to the keyman before maturity, and that exemption under s.10(10D) was then claimed on policies which had originally been keyman insurance policies but had been assigned to some other person during their term. The matter was decided on 2014-01-24 by the CBDT Circulars & Instructions (Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes). On those facts the CBDT Circulars & Instructions held as follows. The Explanation to s.10(10D) was amended so that a keyman insurance policy assigned to any person during its term, with or without consideration, continues to be treated as a keyman insurance policy. The amendment takes effect from 1 April 2014 and applies from assessment year 2014-15 onwards.
The Board describes the amendment as plugging a loophole and checking practices adopted to avoid payment of taxes: the assignment was being used to strip the policy of its keyman character so that the maturity proceeds fell within the general exemption for life insurance receipts. The paragraphs summarised here are the Board's own explanation of the amendment, not a judicial construction of it. In the words reproduced by the source cited on this page: "With a view to plug the loophole and check such practices to avoid payment of taxes, the provisions of clause (10D) of section 10 of the Income-tax Act, 1961 have been amended to provide that a keyman insurance policy which has been assigned to any person during its term, with or without consideration, shall continue to be treated as a keyman insurance policy."
It was decided by the CBDT Circulars & Instructions on 2014-01-24 and is reported as Circular No. 03/2014, F. No. 142/24/2013-TPL, dated 24 January 2014. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(10D), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Explanation to s.10(10D) was amended so that a keyman insurance policy assigned to any person during its term, with or without consideration, continues to be treated as a keyman insurance policy. The amendment takes effect from 1 April 2014 and applies from assessment year 2014-15 onwards. It arises in Capital Gains Exemptions and Salary & Perquisites matters, on section 10(10D) of the Income Tax Act 1961, and was decided by Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For assignments from that year on, treat the receipt as outside s.10(10D) and charge it under s.28(vi), s.17(3)(ii) or s.56(2)(iv) as the recipient requires. Where the assignment is earlier, cite paragraph 5.5 of this circular against any attempt to apply the amended Explanation retrospectively. Read this circular with Circular No. 762 dated 18 February 1998, which sets out the premium deduction and the three charging heads.
Still good law. The amendment it explains is on the statute book and has been carried into the Income-tax Act 2025: the department's PDF of that Act provides that "Keyman insurance policy" has the meaning assigned to it in Schedule II (Note 1), and Note 1 as reproduced on eztax.in carries the assigned-policy words forward. I found no later circular withdrawing or modifying Circular 3/2014. I have not checked whether any court has read the amendment down. That finding was checked against a published source, which is linked on this page, on 2026-08-22. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is an explanatory-notes circular running to the whole Finance Act 2013; only paragraph 5 concerns keyman insurance and only that paragraph is summarised here. I could not open a copy on incometaxindia.gov.in - the two copies I read are a PDF of the circular hosted on itgoawbunit.org and the text reproduced on taxguru.in. The two copies differ in one respect: the PDF carries a further sentence in paragraph 5.3, "The Courts have also noticed this loophole in law.", which the taxguru text does not print. The key quote below is paragraph 5.4, which both copies render identically. The circular does not name any decision. The circular does not say what happens to a policy assigned before assessment year 2014-15 that matures afterwards, does not deal with the tax consequence at the moment of assignment, and does not name the decisions the Board had in mind when it said the courts had noticed the loophole. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Explanation to s.10(10D) was amended so that a keyman insurance policy assigned to any person during its term, with or without consideration, continues to be treated as a keyman insurance policy. The amendment takes effect from 1 April 2014 and applies from assessment year 2014-15 onwards.
TaxSphere, “CBDT Circular 3/2014 - a keyman policy assigned to the keyman stays a keyman policy”, https://taxnotice.vittsphere.com/caselaw/case/cbdt-circular-3-2014-keyman-policy-assignment/ (validity last checked 2026-08-22)
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