Summary
Indian insurance companies are required to adopt Ind AS (the Indian equivalent of the IFRS standards) as the basis for financial reporting effective either 1 April 2026 or 1 April 2027.
The Income Tax Act requires general, health, and reinsurance companies to be taxed on the profit disclosed in the profit and loss account (P&L) prepared as per the Insurance Act and IRDAI regulations. With regulations now shifting the basis of preparation of financial statements to Ind AS, this means that such companies are likely to be taxed based on their Ind AS financial statements.
This leads to three major issues:
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Ind AS adoption is expected to accelerate taxation, without any change in the company’s cash flows. For growing general, health, and reinsurance companies, Ind AS profits will generally be higher than erstwhile Indian GAAP profits, and most Indian insurance companies are growing. Some unrealized gains may also become taxable.
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There may be fresh tax demands against IBNR (Incurred but not Reported) reserves. While courts have repeatedly held that IBNR provisions are not taxable, this has been a subject of repeated litigation. Ind AS changes the accounting head under which IBNR appears (from “claims outstanding” to “liability for incurred claims”), along with changing some aspects of the calculation method. These liabilities may be interpreted as a new category of liability by the Income Tax Department, leading to fresh tax demands and litigation.
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There may be fresh tax demands against URR (Unexpired Risk Reserve). The current tax laws allow for an up to 50% deduction in respect of URR for most lines of business. However, Ind AS changes the accounting head under which URR appears (from “reserve for unexpired risks” to “liability for remaining coverage”), along with changing some aspects of the calculation method. These liabilities may be interpreted as a new category of liability by the Income Tax Department, leading to fresh tax demands and litigation.
The remainder of this article explores these topics.
Tax framework for general, health, and reinsurance companies
For most companies outside the insurance sector, the computation of taxable profits is governed by the ICDS (Income Computation and Disclosure Standards). ICDS has the effect of harmonising the computation of taxable income across different accounting standards.
However, ICDS does not govern the computation of profits from insurance business. As mentioned in the introductory material to ICDS (linked above):
Applicability of ICDS
[…]
The CBDT has clarified Circular No. 10/2017, dated 23-3-2017, that the general provisions of ICDS shall apply to all persons […] unless there are sector specific provisions contained in the ICDS or Act. For example, […] Schedule I of the Act contains specific provisions for insurance business.
The above makes it clear that ICDS is overridden by Schedule I of the Income Tax Act, 1961, which has now been replaced by Schedule XIV of the Income Tax Act, 2025. This 2025 schedule states:
Computation of profits and gains of other insurance business.
4 (1) The profits and gains of any insurance business other than life insurance shall be the profit before tax and appropriations as disclosed in the profit and loss account prepared as per the Insurance Act, 1938 (4 of 1938) or the rules made thereunder or the Insurance Regulatory and Development Authority Act, 1999 (4 of 1999) or the regulations made subject to the following adjustments: […]
(The adjustments referred to above are not of immediate relevance to this topic and therefore have been omitted.)
Reading both together, the taxable profits for general, health, and reinsurance business are the profits disclosed in the P&L prepared as per IRDAI Regulations.
The Institute of Chartered Accountants of India’s Technical Guidance on ICDS comes to the same conclusion (references are to the Income Tax Act, 1961 and not 2025):
10.1 The computation of income of insurance companies is governed by section 44 of the Act read with the First Schedule to the Act. The First Schedule excludes the operation of sections 28 to 43B, and requires the income to be computed as per the Profit & Loss account prepared under the Insurance Act and rules, and the Insurance Regulatory and Development Authority (IRDA) Act and Regulations, subject to certain adjustments laid down under the First Schedule. The IRDA Regulations require the accounts to be prepared by application of Accounting Standards prescribed by ICAI. Section 44 read with the First Schedule would prevail over ICDS. Therefore, ICDS would not be applicable to the computation of business income of insurance companies.
As per the IRDAI regulations and directions on adoption of Ind AS standards,12 Indian insurance companies are to adopt Ind AS as the basis for preparation of their Financial Statements with effect from either 1 April 2026 and 1 April 2027. After adoption, the earlier Indian GAAP financials continue only as “Financial Information”.
Thus, it follows that on adoption of Ind AS, the profits as per the Ind AS financial statements are likely to become taxable for Indian general, health, and reinsurance companies. This is in contrast to other sectors, where taxable profits are calculated as per ICDS irrespective of the accounting standards adopted.
It may be argued that the Financial Information is also prepared as per IRDAI regulations and can therefore continue as the basis of taxation. However, this is a weak argument. The stronger argument is for considering the Financial Statements as the basis of taxation, and given that the Ind AS financial statements are expected to disclose higher profits, the Income Tax Department is likelier to take this stance.
Acceleration of tax due to increase in reported profits
Ind AS adoption is expected to accelerate reported profits and tax.
As a rule of thumb, Ind AS profits will generally be higher than erstwhile Indian GAAP profits for a growing company. This is largely driven by deferral of acquisition costs and discounting of insurance contract liabilities, which are permitted under Ind AS but were not permitted under Indian GAAP. Both these changes have the effect of deferring expenses and accelerating profit.
When a company is growing, the present period expenses deferred to the future will generally be higher than the past period expenses deferred to the present, increasing the company’s reported Ind AS profit in comparison to Indian GAAP. Since this reported profit forms the basis of taxation, tax liability will accelerate in line with profit emergence, even without any change in the company’s underlying cash flows.
Some unrealized gains may also become taxable. Under Indian GAAP, unrealized gains would not hit the P&L and instead be recorded in a Fair Value Change Account (FVCA). Under Ind AS, there is no FVCA. Depending on the company’s business model and other policy choices, some investments may be categorized as “Fair Value through P&L” (FVTPL); for such investments, the mark-to-market gains will flow through P&L and therefore be taxable, even if unrealized.
Taxation of IBNR reserves
It is a settled principle of Indian tax law that a present liability may be deductible even where its amount or timing is uncertain, provided the liability has accrued and can be reliably quantified using a reasonable and scientific basis. See, for instance, the 2009 Supreme Court judgement in the case of Rotork Controls.
IBNR reserves relate to insured events that have already occurred by the reporting date, although the resulting claims have not yet been reported or fully provisioned for. An actuarially determined IBNR reserve constitutes an ascertained rather than contingent liability and is therefore tax deductible.
However, this has not prevented the Indian Income Tax Department from repeatedly attempting to disallow deductions for IBNR reserves. A number of such demands have found their way into various High Courts of India, which have repeatedly held that the deduction is allowable:
| Insurance Company | High Court | Judgement Year | Outcome | Full judgement |
|---|---|---|---|---|
| National Insurance | Calcutta | 2019 | IBNR deduction allowed | Link |
| Care Health Insurance | Delhi | 2024 | IBNR deduction allowed | Link |
| Royal Sundaram | Madras | 2025 | IBNR deduction allowed | Link (Common judgement) |
| Cholamandalam MS | Madras | 2025 | IBNR deduction allowed | Link (Common judgement) |
Litigation on this matter has continued as late as 2025, despite the underlying question of law being well settled.
Under Ind AS, there are a number of changes in how the reserves corresponding to IBNR are calculated: There is now a requirement to have an explicit risk adjustment figure, along with a requirement to discount the liabilities. Further, Ind AS changes the accounting head under which IBNR appears from “claims outstanding” to “liability for incurred claims”.
Such changes should not, prima facie, change the basic provision that IBNR reserves are tax-deductible. However, these changes may lead the Income Tax Department to interpret the liabilities as a new category, leading to fresh tax demands and litigation.
Taxation of UPR / URR
UPR (Unexpired Premium Reserve) / URR (Unexpired Risk Reserve) pertains to the remaining policy period as on the balance sheet date. It is a distinct liability from the IBNR, which pertains to elapsed policy periods.
The tax deduction for URR is capped. Rule 330 of the Income Tax Rules, 2026 (earlier Rule 6E of the Income Tax Rules, 1962) caps it to 50% of the net premium income for most lines of business. (Up to 100% is permitted for terrorism, marine, and export credit insurance.)
As with IBNR, Ind AS makes significant changes to how these liabilities are ascertained. It also changes the head under which this liability appears, from “reserve for unexpired risk” under “provisions” to “liability for remaining coverage”. As with IBNR reserves, these changes may lead the Income Tax Department to interpret the liabilities as a new category, leading to fresh tax demands and litigation.
Current status
The income-tax framework needs to be harmonised with the Ind AS framework that will determine insurers’ reported profits. Without such changes, accounting differences may create tax consequences even where the underlying economics have not changed.
Leaving these questions to litigation would repeat the industry’s experience with IBNR: disputes have spanned two decades, with the National Insurance case mentioned above pertaining to tax year 2004-05, and the Royal Sundaram / Cholamandalam High Court judgement being pronounced in 2025.
Any solution would principally require the Government of India’s Department of Revenue and CBDT, together with DFS, IRDAI and the insurance industry, to revisit Schedule XIV and Rule 330 in light of Ind AS.
To the best of the author’s knowledge, no specific tax reform exercise has yet been announced. Unless these issues are addressed, general, health and reinsurance companies may face significant uncertainty over both the timing and amount of taxable profits.
Footnotes
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IRDAI (Actuarial, Finance, and Investment Functions of Insurers)(Amendment) Regulations, 2026. English text follows Hindi text. ↩
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IRDAI’s circular dated 1 April 2026: Clarifications on implementation of Indian Accounting Standards (Ind AS). English text follows Hindi text. ↩
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