Every year the union budget brings about some changes to the financial policies of India, and they have very significant ramifications on your daily life. put forward some changes in the taxation of life insurance policies that promise to have long-term impacts on the industry, as well as your choice of life insurance plans.
In this article, let's look at what these changes are and what their implications will be.
Life Insurance in India: An Overview
India is touted to be one of the fastest-growing insurance markets in the world. This is indicative of the growing awareness about . Life insurance is a basic need today, something that can not only safeguard your family's financial future in case of your untimely demise but also guarantees mental peace for you. For this reason alone, But no financial decision is ever so simple. You might be looking to buy a life insurance policy for multiple reasons, and your motivation can influence the type of insurance plan, the tenure, the and other factors that make up your plan.
As per the , one of the most popular reasons in India for buying a life insurance plan is accumulating savings. This is generally done through money-back plans, endowment plans, whole-life insurance policies and even some types of retirement plans. The common factor among these life insurance products is that their returns are not linked to the markets, and thus they are considered options for investors.
These are the plans that will witness a change in taxation going forward. This will naturally have a direct impact on life insurance investments. Here is a closer look at these changes in life insurance plans after the Budget announcements.
The Union Finance Minister has also clarified that the proposal will not change taxation rules for ULIPs in the country. However, experts feel that the new change will lead to a sustained and higher focus on term insurance policies and pure risk coverage amongst customers.
How Do These Changes Impact the Choice of Life Insurance?
The changes are worth noting for those seeking high-value money-back or endowment policies. Since the premium for such plans is not invested in stock markets, they do not have any element of volatility associated with their returns. Hence, if you decide to buy these plans, you can calculate the estimated maturity amount in advance. As a result, they are more suited to conservative investors who shy away from taking risks even for long-term financial objectives.
The Union Budget has proposed these changes as a part of an ongoing initiative toward improved targeting of tax exemptions and concessions. The proposal only affects those policies with aggregate premiums above Rs. 5 lakh. The good part about the proposal is that it will not affect the payout from the insurance companies to the nominees of policyholders in case of death. Hence, death benefits will not be taxed accordingly. Simultaneously, there is a small window till the 31st of March, 2023, where investors can avail of such plans without any taxes. The income in question will be taxed as per the category "income from other sources". Deductions will be given for premium amounts in case the same has not been claimed previously for deductions.
Conclusion: What Should You Do?
Consider one more recent change in tax rules initiated by the Finance Act of 2021 concerning ULIPs and their proceeds. In this case, ULIPs with aggregate premiums exceeding Rs. 2.5 lakh in a financial year would have their maturity proceeds taxed. Now with the new changes in taxation for maturity proceeds from traditional life insurance plans as well, changes are targeted at preventing any misuse of tax exemptions by rich and HNWIs (high net-worth individuals) investing in policies with sizable premiums to claim future exemptions on the maturity amounts.
So, if you are not looking for a very high return policy whose premiums might exceed the new limit, you have nothing to worry about. Just remember these rules while buying life insurance policies with higher premium amounts. Also, remember that even if you have multiple policies with smaller premium amounts, their total aggregate should not cross Rs. 5 lakh. Finally, if you still require clarity, consult a financial advisor for better guidance in structuring your portfolio.
Swati Tumar - Travel & Finance Writer
Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.