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As you are aware the Hon’ble Finance Minister has presented Union Budget 2023 on 1st February, 2023. The budget is a progressive and development-oriented budget. The FM has considered all sectors of the country in the budget. The Government has taken care of Agriculture, Infrastructure, Defense, Digital India, Health and Education on equal footing. The main importance has been given to Agriculture, Defense and the Health Sectors. The Government has also fulfilled the demand of middle class by increasing the threshold limit from Rs. 2.50 Lakhs to Rs. 7.00 Lakhs in New Tax Regime. The aim of government is to induce more and more people to move from traditional rebates and deductions (Old Tax Regime) to New Tax Regime.

In this article we are going to discuss changes brought about in the taxation of Income from Life Insurance Policies.

In Budget 2023, Union Finance Minister Nirmala Sitharaman proposed that where the aggregate of premium 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.

This means traditional insurance plans, such as money-back or endowment insurance policies, whole life insurance policies, and retirement plans, will become less appealing to the policyholders. As these plans do not experience return volatility owing to non-participation of their premium into stock markets, conservative investors find them more attractive.

Life Insurance Policies and Budget 2023 amendments

The sum assured and bonus are paid upon maturity in an endowment plan. A percentage of the sum assured is routinely returned back to policyholders under money-back schemes. For instance, if you pay a yearly premium of about Rs 10,000 for an endowment plan with a ten-year term and an amount assured of Rs 1 lakh, the maturity value will be approximately Rs 1.5 lakh after ten years. A money-back plan can have two payments of Rs. 25000 (from the sum assured) each after every three years and the remaining Rs. 50000 along with bonus upon maturity.

The taxation of insurance premiums, as it will impact the high-value savings products that have been relied on by many customers. This, combined with the lack of increase in tax exemptions for premiums paid under health insurance, will negatively impact the growth of both savings and health insurance in India.

DEDUCTION UNDER SECTION 80C

If you have paid an insurance premium to insure your own life or the life of your spouse or child, such premium payments are eligible for deduction under section 80C of the Income Tax Act.

Irrespective of your child being dependent or independent, minor or major, married or unmarried, the deduction under section 80C shall be allowed.

An individual and a HUF, both, can claim this deduction under Section 80C.

Premium paid towards a life cover taken with any insurer that is approved by the Insurance Regulatory and Development Authority of India (IRDAI), is eligible for a Section 80C deduction.

PLEASE NOTE THAT

  1. to claim deduction under section 80C the premium paid should not exceed 10% of the sum assured where the policy has been issued after 1st April 2012.
  2. For policies issued prior to 1 April 2012, in order to claim this deduction, the premium paid should not exceed 20% of the sum assured.
  3. Further, here it is important to note that a policy issued after 1 April 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB, the requirement to claim the deduction under Section 80C is that the premium should not exceed 15% of the sum assured.

"Sum assured" simply means the minimum amount assured under the policy to the survivor. This amount does not include premium which has been agreed to be returned or any payment of bonus on the policy."

EXEMPTION UNDER SECTION 10(10D) ON MATURITY AMOUNT RECEIVED

  1. When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1 April 2012 and 20% of sum assured for policies issued before 1 April 2012– any amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D).
  2. Also covered here are policies taken after 1 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax-free provided the premium paid does not exceed 15% of the sum assured.

NO EXEMPTION FROM INCOME TAX ON THE MATURITY OF POLICIES

Taxation, where the premium paid, is more than 10% of the sum assured – Any money received from a life insurance policy, where the premium is more than 10% or 20% of the sum assured as the case may be, is fully taxable.

 

CHANGES IN BUDGET 2023

Investors paying premium of over Rs.5 lakh to buy life insurance policies other than ULIPs will have to pay tax on their maturity proceeds. However, if such a policyholder dies then the maturity proceeds for the nominee will be tax free, clarified the government.

Overall, premium paid towards term insurance, whole life, money back and endowment will be considered to arrive at total premium payment. While term insurance generally does not have any maturity proceeds, it will be considered for calculation purpose. Also, the premium calculation will be done at PAN level.

Further, the government clarified that the maturity proceeds from life insurance policies will be added to income from other sources for taxation.

In a Memorandum to the Finance Bill, 2023, the government said that the exemption under section 10 (10D) intends to provide benefit to small and genuine cases of life insurance coverage. However, over the years, it is observed that several high-net-worth individuals misuse the exemption by investing in policies having large premium contributions to avoid tax, said the government.

LET'S UNDERSTAND THE CHANGES THROUGH AN EXAMPLE

Mr. A has invested in below mentioned Life Insurance Policies;

Policy No.

Premium /Year (Rs.)

Sum Insured( Rs.)

1

2,50,000

25,00,000

2

1,50,000

15,00,000

3

65,000

6,50,000

4

1,25,000

12,50,000

5

2,34,500

25,00,000

6

1,75,600

25,00,000

 

In above cases, since total premium paid by Mr. A during the year was Rs. 10,00,100/- on 6 insurance policies. Now as per amendment in Budget 2023 the maturity proceeds or income only from those Insurance Policies will be exempted whose aggregate premium does not exceed Rs. 5.00 Lakhs. In this case Mr. A can choose various options to claim tax free incomes as follows;

  • Income or Maturity Proceeds from Policies ( 1+2+3)= Total Premium Rs. 4,65,000 > Rs. 5,00,000 will be exempted and Income from Policies ( 4+5+6) are taxable;
  • Income or Maturity Proceeds from Policies ( 3+4+5)= Total Premium Rs. 4,24,500 > Rs. 5,00,000 will be exempted and Income from Policies ( 1+2+6)) are taxable;
  • Income or Maturity Proceeds from Policies ( 1+5)= Total Premium Rs. 4,84,500> Rs. 5,00,000 will be exempted and Income from Policies ( 1+2+6+3+4)) are taxable;

There may be more combination as per choice of Mr. A as may be decided on the basis of income and maturity proceeds.

He may opt for Policy 1 and Policy 5 ,since SI and Income, in this case, will be Rs. 50.00 Lakhs and Premium Paid will be covered under provisions of Section 10(10D).

CONCLUSION

Insurance Industry has disappointed by Budget 2023, it was expected that the Government increase 80C & 80D limits and encourage more savings and insurance. The Government in this Budget has given various tax incentives to those who will migrate Old Tax Regime to New Tax Regime, tis will also to some extent restrict customers to buy insurance products for tax saving purposes. Since there is not Tax Exemption on Insurance Policies and hence customers will not keep to put money for the purpose of investment in Insurance Products. The Government has also brought into taxation net Insurance Policies of premium more than Rs. 5.00 Lakhs into tax net. Any income on maturity in those policies exceeding premium of Rs. 5.00 Lakhs will be taxable. This will reduce investment by High-Net-worth Individuals. Overall, the Budget 2023 scenario for insurance sector is not good.

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Published by

FCS Deepak Pratap Singh
(Manager Compliance -SBI General Insurance Co. Ltd.)
Category Union Budget   Report

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