Income-tax Act 2025 and Commercial Insurance: How Premium Deductibility, Keyman Proceeds and Claim Receipts Are Taxed From April 2026

The Income-tax Act, 2025 (Act 30 of 2025) received Presidential assent in August 2025 and takes effect from 1 April 2026, replacing the sixty-four-year-old Income-tax Act, 1961 for assessment year 2026-27 onwards. For corporate finance and risk teams, the practical shock is not a change in what insurance costs or pays; it is that almost every section number they have cited for a decade has moved. The 1961 Act ran to more than eight hundred sections accreted through six decades of Finance Acts. The 2025 Act consolidates the same law into a shorter, re-sequenced structure, cutting cross-references and clubbing scattered provisos into cleaner clauses.

The substance on commercial insurance is largely carried forward. A premium paid to protect a business asset or liability remains deductible on the same wholly-and-exclusively test. Keyman policy proceeds remain a taxable business receipt rather than an exempt payout. A claim cheque is still taxed, or not taxed, according to whether it replaces revenue or capital. What has changed is the vocabulary. A finance team that writes to an insurer, an auditor or an assessing officer citing Section 37(1), Section 28(vi) or Section 10(10D) will, from April 2026, be quoting a repealed statute.

This matters more than it sounds. Insurance documentation, board notes, tax provisioning workpapers, transfer-pricing files and internal deduction policies all hard-code the old numbers. Getting the crosswalk right is a housekeeping exercise, but a wrong or stale citation in a scrutiny assessment invites avoidable questions. This post does two things: it maps the old references corporate teams know to their 2025-Act successors, and it restates the actual tax treatment of commercial premiums, keyman payouts and claim receipts so that the renumbering does not become an excuse for getting the economics wrong. Treatment described here reflects the position as enacted; confirm your specific facts with your tax adviser.

Corporate India reasons about insurance tax through three anchor provisions of the old Act, and each has a successor in the 2025 Act that finance teams should note in their workpapers.

The first is the residual business-deduction clause, old Section 37(1), which allowed any expenditure laid out wholly and exclusively for business that was not capital, not personal and not otherwise disallowed. This is the provision under which most commercial insurance premiums are claimed. In the Income-tax Bill, 2025 as introduced in the Lok Sabha, this general-deduction rule appeared as Clause 34, and it carries forward the identical wholly-and-exclusively test and the same explicit carve-outs (offence-linked spends, CSR obligations under the Companies Act, and disallowed political expenditure). The controlling phrase brokers and CFOs should recognise is unchanged; only the label moves.

The second is old Section 28, which defines the profits and gains chargeable as business income and, at clause (vi), specifically brings any sum received under a keyman insurance policy (including bonus) into business income. The 2025 Act retains an equivalent charging provision for business income with the keyman receipt expressly included, so the taxability of a keyman payout to the business is preserved, not diluted.

The third is old Section 10(10D), the exemption for sums received under a life insurance policy. Its long-standing proviso excludes keyman insurance policy proceeds from that exemption, which is precisely why keyman payouts are taxable. The 2025 Act reproduces the life-policy exemption with the same keyman exclusion intact.

The headline for finance teams is reassuring on substance and demanding on citation. The rules that make a commercial premium deductible, a keyman payout taxable and a claim receipt characterisable have survived the recodification. The discipline required is clerical accuracy in referencing them.

For the bulk of a corporate insurance programme, deductibility is straightforward and unchanged. Premiums paid on fire and property, marine and transit, engineering and project, business-interruption, liability (public, product, professional indemnity) and directors and officers covers are revenue expenditure incurred wholly and exclusively to protect the business against operational risk. They satisfy the successor to Section 37(1) and are deductible in the year incurred, subject to the ordinary matching and prepayment rules where a premium spans two financial years.

Three recurring points decide whether a specific premium survives scrutiny, and none of them turns on the renumbering.

First, the insurable-interest and business-nexus test. The expenditure must protect an asset or liability of the business claiming the deduction. Premiums paid by a company on assets it neither owns nor is contractually obliged to insure, or on the personal risks of promoters dressed up as business cover, are vulnerable to disallowance as not wholly and exclusively for business. Group programmes where one entity pays and several benefit need a defensible cost-allocation and recharge basis so each deducting entity can show its own nexus.

Second, the capital-versus-revenue boundary. A premium that is genuinely an annual protection cost is revenue. But where an insurance-linked payment secures an enduring advantage or is really the cost of acquiring a capital asset, the deduction can be challenged. Standard annual property, marine and liability premiums sit clearly on the revenue side.

Third, directors and officers premium borne by the company is generally deductible as a business expense protecting the company's own exposure, but the perquisite question for the insured individuals is a separate analysis that the payroll and tax team must run under the new Act's salary-perquisite provisions.

Keyman insurance is where corporate finance teams most often misread the tax result, and the 2025 Act does nothing to soften it. A keyman policy is one a business takes on the life of a director or critical employee, with the business as proposer and beneficiary, to protect against the financial dislocation of losing that person. The tax treatment has three moving parts, all preserved from the 1961 Act into the new one.

The premium paid by the business is generally deductible as a business expense, on the same wholly-and-exclusively reasoning discussed above, because the policy protects a genuine business interest against the loss of a person whose death or disability would hurt the firm. Tribunals under the old law have upheld this even for policies on the lives of partners in a firm, provided the business-protection purpose is real.

The proceeds are the trap. Because old Section 10(10D) expressly excluded keyman policy sums from the life-insurance exemption, and old Section 28 expressly brought them into business income, a maturity or death benefit received by the company under a keyman policy is fully taxable as business income, not an exempt payout. The 2025 Act carries both limbs forward, so the position is unchanged: the payout the company relied on to absorb the shock of losing a key person arrives net of corporate tax.

A further wrinkle survives too. If a keyman policy is assigned to the insured individual before maturity (a common exit arrangement), the assignment does not automatically convert it into an ordinary exempt life policy for tax purposes. This has been litigated, and the safer planning assumption is that the keyman taint follows the policy.

The practical lesson for CFOs sizing a keyman cover is to gross up. If the intent is to leave the business with, say, a given net sum after a key person's death, the sum insured must be set high enough to survive tax on the proceeds. Treating the face value as tax-free will leave the business short at exactly the moment the cover was meant to help.

The question corporate treasuries ask most often, and the one with the least intuitive answer, is whether a claim settlement is taxable in the company's hands. The 2025 Act preserves the settled principle: a claim receipt takes the tax character of whatever it replaces. It is not the payout itself that decides taxability, but what it stands in for.

Where a claim replaces lost revenue or a deductible expense, the receipt is taxable business income. The clearest case is business-interruption or loss-of-profits cover: the insurer is indemnifying the profit the business would have earned, so the settlement is taxed exactly as that profit would have been. Similarly, a claim reimbursing trading-stock damaged in a fire is a revenue receipt, particularly where the cost of that stock was already claimed as a deduction. Recovery of a business expense that was previously deducted is brought back into income.

Where a claim replaces a capital asset, the analysis shifts. Compensation for damage to or destruction of plant, machinery or a building is not ordinary income; it interacts instead with the depreciation and capital-gains machinery. Under the block-of-assets system carried into the 2025 Act, insurance money on a destroyed depreciable asset is deducted from the relevant block, which can trigger a short-term capital gain if the receipt exceeds the block's written-down value. For a non-depreciable capital asset, insurance compensation on destruction is treated as a transfer for capital-gains purposes under the successor to the old Section 45(1A) deeming rule.

The planning consequence is that a risk manager and the tax team should read the claim the way the policy is structured, splitting material damage from consequential loss, because the policy wording and the loss-adjuster's apportionment drive the tax result as much as the cheque total does.

The transition to the 2025 Act is low-drama on substance but unforgiving on documentation, and the window to prepare is the first assessment year under the new law. A short, concrete checklist covers most of the exposure.

First, re-cite the workpapers. Update the standing tax and insurance files, deduction policies and board notes to reference the 2025-Act provisions alongside the familiar 1961 numbers, and verify each mapping against the enacted text rather than assuming the number carried over.

Second, re-examine keyman covers. Confirm that every keyman policy has a real business-protection rationale to defend the premium deduction, and gross up the sum insured for tax on proceeds so the cover delivers the intended net amount. Review any planned assignments to insured individuals with tax advice, given the persistence of the keyman taint.

Third, tidy group-programme allocations. Where a master policy covers several entities, document the allocation and recharge basis before renewal so each deducting company can evidence its own insurable interest and nexus.

Fourth, build a claim-characterisation habit. For any material loss, split material damage from business interruption at first notification and carry that split through the loss-adjuster's apportionment, the accounting entries and the tax computation, so the capital and revenue portions are taxed correctly.

None of this requires a new insurance strategy. It requires precise reading of what each policy actually covers, which entity holds the interest, and how a payout will be characterised, mapped onto a renumbered but substantively continuous tax code.

That precision is exactly where structured access to policy wordings earns its keep. Sarvada gives brokers and corporate risk teams searchable, structured intelligence across insurer policy wordings, so a finance team can see how a keyman clause, a business-interruption extension or a material-damage basis is actually drafted before it reasons about the tax result. To bring that level of rigour to your premium-deduction, keyman and claim-taxation analysis for FY2026-27, Request Access.