When B receives dividends from a participating life insurance policy, which portion is subject to income tax?

Dividends received from a participating life insurance policy are generally considered a return of premium and therefore are not subject to income tax. This is because they are regarded as a return of the policyholder's own money that has been paid into the policy.

However, any interest that may accumulate on those dividends is subject to income tax. This is because the interest is considered income, resulting from the investment of the dividends rather than a return of the original premium.

In this case, the correct answer focuses on the interest accrued rather than the dividends themselves or the principal amount. This distinction is crucial in understanding how tax laws apply to different aspects of life insurance policies.