Circular No. 500

What this is

Circular No. 500 was issued by the Central Board of Direct Taxes on 9 December 1987. Its subject is 1333. Life Insurance Corporation’s new annuity plan with return of corpus with group pension terminal bonus - Approval by Commissioner to deed of variation executed by approved superannu­ation funds incorporating new annuity plan - Part B of Fourth Schedule read with rule 89 of Income-tax Rules.

What it does

Clears the way for approved superannuation funds to move to a new Life Insurance Corporation annuity. Under rule 89 the trustees may either take a scheme of insurance with the Corporation or accumulate contributions and buy an annuity on retirement, death or earlier incapacity, and the Corporation had been offering only a life annuity, a life annuity with payment guaranteed for five, ten, fifteen or twenty years, and a joint annuity. The Corporation has now brought out a plan with whole life assurance benefits and a group pension terminal bonus, under which on the member's death the sum assured equal to the corpus is returned to the beneficiary with that bonus, and existing annuitants may also take it. The Board says that where an approved superannuation fund executes a deed of variation to take in the new plan, the Commissioner may approve that deed after satisfying himself that the conditions in Part B of the Fourth Schedule and the relevant Rules are met.

Why it was issued

The new plan was introduced to give beneficiaries a better return and to answer the criticism that an annuity paid only a little more than interest on the capital while the capital itself was lost on death.

Who it reaches

• Trustees of approved superannuation funds considering the new plan
• Employers whose superannuation schemes are insured with the Corporation
• Members and their beneficiaries under such funds
• Commissioners of Income-tax dealing with deeds of variation

The instrument, as the Board published it

1333. Life Insurance Corporation’s new annuity plan with return of corpus with group pension terminal bonus - Approval by Commissioner to deed of variation executed by approved superannu­ation funds incorporating new annuity plan - Part B of Fourth Schedule read with rule 89 of Income-tax Rules
1. As per rule 89 of Income-tax Rules, 1962, the trustees of an approved superannuation fund may either enter into a scheme of insurance with Life Insurance Corporation of India (LIC) or accumulate the contributions in respect of each beneficiary and purchase on annuity from the LIC at the time of retirement or death of each employee or on his becoming incapacitated prior to retirement.
2. Under the existing provisions, the LIC have been offering the option of purchasing any of the following three annuities:
(a) annuity payable for life only ;
(b) annuity payable for life with guaranteed payment for 5, 10, 15 or 20 years;
(c) annuity payable jointly with the beneficiary till one of them is alive.
3. The LIC has recently come out with a new life annuity plan with benefits available under whole life assurance plan with group pension terminal bonus, which provides that on death of the member, the sum assured equal to the corpus is returned with the group pension terminal bonus to the beneficiary. Existing annui­tants may also avail of the benefit of this plan which has been introduced by the LIC in order to give higher returns to benefi­ciaries of approved superannuation funds and to meet the criti­cism that annuity payment represented only periodical payment marginally higher than the interest on capital and on death the capital was lost.
The Board are of the view that in cases where approved superannu­ation funds execute deeds of variation incorporating the provi­sions of new annuity plan, the Commissioners of Income-tax may accord approval to the said deed of variation after satisfying themselves that the conditions laid down in Part ‘B’ of the Fourth Schedule and the relevant Income-tax Rules are satisfied.
Circular : No. 500 [F.No. 216/10/87-IT(A-II), dated 9-12-1987.

What to watch

• Approval is not automatic; the Commissioner has to be satisfied on Part B of the Fourth Schedule and the Rules before he approves the deed.
• The fund must actually execute a deed of variation; adopting the plan without amending the trust deed is not what the circular contemplates.
• Existing annuitants may switch, as the circular records, but the fund's approval position still turns on the deed.
• The circular permits approval of the deed and says nothing about the tax treatment of the corpus or the terminal bonus in a beneficiary's hands.

Where you meet it

When a superannuation fund files a deed of variation with the Commissioner and the office asks on what authority the new annuity may be taken in.

What it names

Rules it names. Rule 89 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.

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