Direct Tax Laws & International Taxation · Miscellaneous Provisions

Reserve for Unexpired Risks of Insurers

Updated 5 October 2026 · Fact-checked

Reserve for unexpired risks is the part of premium a general insurer sets aside for risks that run beyond the year-end. For tax, the reserve is allowed up to 100% of net premium for marine insurance and 50% for other general insurance. Replace the charge in the books with the allowed amount, and adjust profit by the difference.

Understand Reserve for Unexpired Risks of Insurers

A general insurer collects premium for a policy period. Often the policy runs past the end of the year. The part of the premium that relates to the period after the year-end has not yet been "earned". The insurer keeps a reserve for it. This is the reserve for unexpired risks.

In the books, the insurer creates this reserve under insurance regulations and accounting practice. If tax followed the books fully, an insurer could park a large amount in the reserve and cut taxable profit. So the tax law sets its own limit.

Profits of general insurance business (fire, marine, miscellaneous) are computed under the special provisions for insurers, not under the normal business-income method. The starting point is the profit shown in the insurer's statutory accounts. You then adjust it as the special rules for insurers require. One key adjustment is the reserve for unexpired risks.

The rule is this. The reserve for unexpired risks is allowed as a deduction in computing profit, up to 100% of net premium income of the tax year for marine insurance business (cargo) and 50% of net premium income for other general insurance business such as fire and miscellaneous. The reserve must actually be created in the accounts. A limit alone gives no deduction. If the actual reserve is lower than the limit, only the actual reserve is allowed.

Statutory source. These caps come from the special rules for computing profits of insurance business other than life insurance. Under the Income-tax Act, 2025, they are in the provision that corresponds to Rule 6 of the First Schedule to the earlier Income-tax Act, 1961. That rule is where the 100% (marine) and 50% (other classes) limits on the reserve for unexpired risks were first laid down. In an exam answer, cite it as the special provision for computing profits of general insurance business, and quote the section number only if your study material gives it.

The opening reserve is treated as an income item. The reserve is a closing balance. The opening reserve of the year is brought back to the revenue account as a credit, and a fresh closing reserve is charged. If part of the opening reserve was disallowed in an earlier tax year, that part was already taxed in that year. It should not be taxed again when it is brought back.

The mechanism is replacement. The provision the books charged for the year is taken out of profit. The allowed amount goes in its place. So the adjustment is the net charge in the books minus the net allowed charge. Net charge in the books = closing reserve − opening reserve brought back. Net allowed charge = allowed closing reserve − the opening reserve allowed earlier.

In the simple case, there is no opening reserve and the books charged the full closing reserve. The adjustment then reduces to adding back only the excess of the closing reserve over the allowed amount. This is a special case and not the general rule. The first two worked examples use it and say so. The third example shows an opening reserve.

Key rules to remember

Net premium income: Net premium income = Premium received and receivable − Reinsurance premium paid or payable; Work class by class. Use the net figure, not the gross premium, as the base for the cap.
Cap for marine business (cargo): Limit = 100% × Net premium income of the tax year; Applies to marine insurance business (cargo). Source: the special provision for general insurance business under the Income-tax Act, 2025, corresponding to Rule 6 of the First Schedule to the earlier 1961 Act.
Cap for other general insurance: Limit = 50% × Net premium income of the tax year; Applies to fire and miscellaneous insurance business. Same source as the marine cap.
Allowable reserve: Allowed closing reserve = Actual closing reserve created in accounts, limited to the Limit; The reserve must actually be created in the accounts. A limit alone gives no deduction. If the actual reserve is below the limit, only the actual reserve is allowed.
Adjustment to book profit: Adjustment = (Closing reserve in books − Opening reserve in books) − (Allowed closing reserve − Opening reserve allowed earlier); The charge in the books is replaced by the allowed amount. A positive result is added to book profit. A negative result is deducted. Simplified case: if there is no opening reserve and the books charged the full closing reserve, the adjustment is the closing reserve minus the allowed reserve, that is, the excess only. Use this only where those two conditions hold.

How to solve Reserve for Unexpired Risks of Insurers questions

Use this method for any question on the reserve for unexpired risks of a general insurer. First check whether the question gives an opening reserve. If it does not, state that you assume none.

1Identify the class of business: marine (cargo) or other general insurance such as fire and miscellaneous. Treat each class separately.
2Compute net premium income for each class: premium less reinsurance premium paid or payable.
3Apply the prescribed percentage: 100% for marine, 50% for the other classes. This gives the limit.
4Pick up the actual closing reserve created in the accounts for each class.
5Allow the actual closing reserve, limited to the limit, class by class.
6Find the net charge in the books: closing reserve minus the opening reserve brought back to profit. If no opening reserve is given, state that you assume none, so the net charge is the closing reserve.
7Find the net allowed charge: allowed closing reserve minus the opening reserve allowed earlier. With no opening reserve, this is the allowed closing reserve.
8Adjustment = net charge in the books − net allowed charge. Add a positive figure to the profit per the accounts. Deduct a negative figure.
9Total the adjustments with the other items in the question and state the final profit.
10Write a one-line conclusion: reserve allowed only to the extent created and within the prescribed limit on net premium income.

Quickest way: Three-column table: limit, actual, allowed

When to use it: Use when the question gives several classes of business with premium and reserve figures and asks for the allowable reserve or adjusted profit.

Draw three columns per class: Limit, Actual, Allowed.
Limit = 100% or 50% of net premium. Check the net figure first.
Allowed = the smaller of the first two columns.
Adjustment = (Actual − opening reserve in books) − (Allowed − opening reserve allowed earlier). Add the total to profit.
Check what the books actually charged for the year before you adjust.
Check for an opening reserve. If none is given, write your assumption. The excess-only shortcut holds only then.

Common mistakes in Reserve for Unexpired Risks of Insurers

Applying the percentage to gross premium instead of net premium income.
The question shows the gross premium first and students use it without reading the reinsurance line.
Fix: Deduct reinsurance premium first. Write the net figure before applying 100% or 50%.
Allowing the full limit even when the actual reserve created is lower.
Students treat the percentage as an entitlement.
Fix: The limit is a ceiling. The deduction is the actual reserve created, restricted to the limit.
Using 50% for every class, or 100% for every class.
Students remember only one percentage.
Fix: Tag each class. Marine (cargo) gets 100%. Fire and miscellaneous get 50%. Compute each class separately.
Adding back the whole reserve instead of only the excess.
Confusion between disallowing the reserve and capping it.
Fix: The books' charge is replaced by the allowed amount. Adjust only by the difference between the two.
Applying the excess-only add-back without checking what the books actually charged.
Students apply the shortcut mechanically.
Fix: Compare the net charge in the books for the year with the net allowed charge. The shortcut holds only where there is no opening reserve and the books charged the full closing reserve.
Ignoring the opening reserve that is brought back to profit.
Students treat the reserve as a one-year figure and forget it is a closing balance.
Fix: Check for an opening reserve. The opening reserve is an income item. Any part disallowed in an earlier tax year should not be taxed again, so reduce the adjustment by that part. If none is given, state your no-opening-reserve assumption.
Netting all classes together before applying the cap.
To save time, students pool premiums and reserves.
Fix: Apply the cap class by class. Excess in one class cannot be set off against spare room in another.

Worked examples

Example 1

A general insurer carries on fire insurance business. For the tax year, gross premium is ₹52,00,000 and reinsurance premium paid is ₹12,00,000. It created a closing reserve for unexpired risks of ₹24,00,000 in its accounts and charged it fully. There was no opening reserve. Profit per the accounts, after this charge, is ₹60,00,000. Ignoring other adjustments, find the profit for tax purposes.

Show the solution

Net premium income = ₹52,00,000 − ₹12,00,000 = ₹40,00,000.
Fire business is covered by the 50% limit. Limit = 50% × ₹40,00,000 = ₹20,00,000.
Actual closing reserve created = ₹24,00,000.
Allowed closing reserve = ₹24,00,000 restricted to ₹20,00,000 = ₹20,00,000.
Assumption: no opening reserve and the books charged the full closing reserve. So net charge in the books = ₹24,00,000 and net allowed charge = ₹20,00,000.
Adjustment = ₹24,00,000 − ₹20,00,000 = ₹4,00,000, to be added. This is the excess-only shortcut.
Adjusted profit = ₹60,00,000 + ₹4,00,000 = ₹64,00,000.

Answer: Reserve allowed is ₹20,00,000. Add ₹4,00,000. Profit for tax purposes is ₹64,00,000 (before other adjustments, assuming no opening reserve).

Example 2

An insurer does marine cargo business and miscellaneous insurance business. Net premium income is ₹30,00,000 for marine cargo and ₹20,00,000 for miscellaneous. Closing reserves created and charged in the accounts are ₹28,00,000 for marine cargo and ₹12,00,000 for miscellaneous. There was no opening reserve. Profit per the accounts, after the charges, is ₹95,00,000. Find the allowed reserve and the adjusted profit, ignoring other adjustments.

Show the solution

Marine cargo limit = 100% × ₹30,00,000 = ₹30,00,000. Actual = ₹28,00,000. Allowed = ₹28,00,000. Adjustment = ₹28,00,000 − ₹28,00,000 = nil.
Miscellaneous limit = 50% × ₹20,00,000 = ₹10,00,000. Actual = ₹12,00,000. Allowed = ₹10,00,000. Adjustment = ₹12,00,000 − ₹10,00,000 = ₹2,00,000.
Total allowed = ₹28,00,000 + ₹10,00,000 = ₹38,00,000.
Assumption: no opening reserve and the books charged the full closing reserve. Net charge in the books = ₹28,00,000 + ₹12,00,000 = ₹40,00,000.
Total adjustment = ₹40,00,000 − ₹38,00,000 = ₹2,00,000, to be added.
Adjusted profit = ₹95,00,000 + ₹2,00,000 = ₹97,00,000.

Answer: Allowed reserve is ₹38,00,000 (₹28,00,000 marine cargo and ₹10,00,000 miscellaneous). Add ₹2,00,000. Adjusted profit is ₹97,00,000 (assuming no opening reserve).

Example 3

A general insurer carries on fire insurance business. Net premium income for the tax year is ₹40,00,000. It created a closing reserve of ₹24,00,000 in its accounts. The opening reserve brought back to the revenue account was ₹18,00,000. In the earlier tax year, net premium income was ₹30,00,000, so the limit then was 50% × ₹30,00,000 = ₹15,00,000. Only ₹15,00,000 of the opening reserve was allowed then, and the other ₹3,00,000 was disallowed and taxed in that year. Profit per the accounts, after the net charge for the reserve, is ₹60,00,000. Ignoring other adjustments, find the profit for tax purposes.

Show the solution

Limit = 50% × ₹40,00,000 = ₹20,00,000.
Allowed closing reserve = ₹24,00,000 restricted to ₹20,00,000 = ₹20,00,000.
Net charge in the books = ₹24,00,000 − ₹18,00,000 = ₹6,00,000.
Opening reserve allowed earlier = ₹15,00,000, the earlier-year limit. Net allowed charge = ₹20,00,000 − ₹15,00,000 = ₹5,00,000.
Adjustment = ₹6,00,000 − ₹5,00,000 = ₹1,00,000, to be added.
Check: excess of the closing reserve = ₹24,00,000 − ₹20,00,000 = ₹4,00,000. Less the opening part disallowed and already taxed in the earlier year = ₹18,00,000 − ₹15,00,000 = ₹3,00,000. Net = ₹1,00,000. This agrees.
Adjusted profit = ₹60,00,000 + ₹1,00,000 = ₹61,00,000.

Answer: Allowed closing reserve is ₹20,00,000. Add ₹1,00,000. Profit for tax purposes is ₹61,00,000 (before other adjustments). The shortcut of adding ₹4,00,000 would be wrong here because of the opening reserve.

Exam tips

Expect a short case with premium, reinsurance and reserve figures. The test is usually the comparison of actual reserve with the limit.
Always show the limit, the actual and the allowed amount in a small table. Examiners give step marks.
Write the class of business and its percentage explicitly. A wrong percentage loses the whole answer.
If the question gives an opening reserve, show how it is dealt with. If it does not, write "assuming no opening reserve".
In theory questions, state both conditions: the reserve must be created in the accounts, and it must stay within the prescribed limit on net premium income.
Use the term "tax year". Do not refer to the old assessment-year language.

Practice questions from Miscellaneous Provisions

Reserve for Unexpired Risks of Insurers: frequently asked questions

What is the limit on reserve for unexpired risks for a general insurer?

The reserve is allowed as a deduction in computing profit, up to 100% of net premium income of the tax year for marine insurance business (cargo) and 50% for other general insurance such as fire and miscellaneous. The reserve must actually be created in the accounts. If the actual reserve is lower, only that amount is allowed. The source is the special provision for computing profits of general insurance business under the Income-tax Act, 2025. It corresponds to Rule 6 of the First Schedule to the earlier Income-tax Act, 1961.

Is the limit applied on gross or net premium?

It is applied on net premium income, which is premium less reinsurance premium paid or payable. Using gross premium overstates the cap and is a common error.

What if the reserve created is less than the limit?

Then only the actual reserve created is allowed. The percentage is a ceiling, not a guaranteed deduction.

What happens to the opening reserve?

The reserve is a closing balance. The opening reserve is brought back to profit as an income item. Any part that was disallowed in an earlier tax year should not be taxed again. If a question gives no opening reserve, state that you assume none.

Does this rule apply to life insurance business?

No. This topic covers general insurance business. Life insurance profits are computed on a different basis, so do not apply these percentages to it.