Are you thinking of investing in Life Insurance Policies? If yes, then read before investing.
Overview
In Budget 2023, Union Finance Minister Nirmala Sitharaman proposed that where the aggregate of premium of life insurance policies (other than ULIP) issued on or after April 1, 2023, is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt. This will not affect the tax exemption provided to the amount received on the death of the person insured. It will also not affect insurance policies issued till March 31, 2023.
Deduction Under Section 80C
If you paid an insurance premium to insure your own life or the life of a spouse or child, the premium payments are deductible under section 80C of the Income Tax Act.
The deduction under section 80C is allowed whether your child is dependent or independent, minor or major, married or unmarried.
An individual and an HUF, both, can claim this deduction under Section 80C.
Note:
If the policy was issued after April 1, 2012, the premium paid should not exceed 10% of the sum assured in order to claim a deduction under section 80C.
To claim this deduction for policies issued prior to April 1, 2012, the premium paid must not exceed 20% of the sum assured.
Furthermore, it is important to note that for a policy issued after 1 April 2013, covering the life of an individual with a disability referred to in Section 80U or a disease referred to in Section 80DDB, the premium cannot exceed 15% of the sum assured in order to claim the deduction under Section 80C.
Exemption Under Section 10(10D) On Maturity Amount Received
When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after April 1, 2012, and 20% of the sum assured for policies issued prior to April 1, 2012, any amount received on maturity of a life insurance policy or any amount received as bonus is fully exempt from Income Tax under Section 10(10D).
Policies taken after April 1, 2013 on the life of a person with a disability or a disease specified under Sections 80U and 80DDB, respectively, are also covered, and the amount received at maturity is tax-free, provided the premium paid does not exceed 15% of the sum assured.
No Exemption from Income Tax on Policy Maturity
If the premium for a life insurance policy exceeds 10% or 20% of the sum assured, as the case may be, all money received from the policy is completely taxable.
Changes in Budget 2023
Investors who pay premiums of more than Rs.5 lakh to purchase life insurance policies other than ULIPs must pay tax on the maturity proceeds. The government clarified that if such a policyholder dies, the maturity proceeds for the nominee will be tax-free.
Total premium payment will take into account premiums paid for term insurance, whole life, money back, and endowment. While term insurance typically has no maturity proceeds, it will be taken into account for calculation purposes. Furthermore, the premium will be calculated at the PAN level.
Furthermore, the government clarified that the maturity proceeds from life insurance policies will be added to other sources of income for taxation purposes.
The government stated in a Memorandum to the Finance Bill, 2023, that the exemption under section 10(10D) is intended to benefit small and genuine cases of life insurance coverage. However, the government claims that over the years, several high-net-worth individuals have abused the exemption by investing in policies with large premium contributions in order to avoid tax.
Let's understand the changes through an example
Mr. X has invested in below mentioned Life Insurance Policies;
Policy | Premium/Year (Rs.) | Sum Insured (Rs.) |
1 | 2,30,000 | 23,00,000 |
2 | 1,10,000 | 11,00,000 |
3 | 2,90,000 | 30,00,000 |
4 | 1,50,000 | 15,00,000 |
5 | 1,20,000 | 12,00,000 |
In the above cases, Mr. X's total premium paid during the year was Rs. 9,00,000/- on 5 insurance policies. According to an amendment in Budget 2023, maturity proceeds or income from Insurance Policies whose aggregate premium does not exceed Rs. 5 Lakhs will be exempted. In this case, Mr. X has the following options for claiming tax-free income:
Income or maturity proceeds from policies (1+4+5) = Total premium Rs. 5,00,000 will be exempted, whereas income from policies (2+3) is taxable.
Income or Maturity proceeds from policies (3+4) = Total premium Rs. 4,40,000 will be exempted, whereas income from policies (1+2+5) is taxable.
Income or Maturity proceeds from policies (2+3) = Total premium Rs. 4,00,000 will be exempted, whereas Income from policies (1+4+5) is taxable.
There may be more combinations as per choice of Mr. X as may be decided on the basis of income and maturity proceeds.
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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Asif Hussain
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