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CA Final · Direct Tax Laws & International Taxation · Miscellaneous Provisions

Surya General Insurance Ltd carries on fire insurance business (not covering terrorism risks) in the tax year. Premium received is Rs 40 crore and reinsurance premium paid is Rs 8 crore. It carries Rs 20 crore to the reserve for unexpired risks. As per Rule 330 of the Income-tax Rules, 2026, what is the maximum deductible reserve, and what amount is not allowed?

The cap is 50% of net premium income. Net premium is Rs 32 crore after deducting reinsurance premium, so the maximum reserve deduction is Rs 16 crore. Of the Rs 20 crore carried over, Rs 4 crore is disallowed.

  1. ADeductible Rs 16 crore; Rs 4 crore not allowedCorrect
  2. BDeductible Rs 20 crore; nil not allowed
  3. CDeductible Rs 32 crore; nil not allowed
  4. DDeductible Rs 12 crore; Rs 8 crore not allowed

Explanation

Net premium income = 40 - 8 = Rs 32 crore. Fire insurance not covering terrorism risks falls under clause (b), with a cap of 50%, which is Rs 16 crore. The amount carried over is Rs 20 crore, so Rs 4 crore is disallowed. Using 50% of the gross premium (Rs 20 crore) is the wrong base.

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