By Sudin Sabnis
The Budget has introduced a monetary cap of Rs 5 lakh on premium paid under any insurance policy (except unit-linked insurance plans or Ulips issued on or after April 1, 2023) in a financial year for claiming such tax exemptions. In case of multiple policies of a taxpayer, the said exemption would be available only in case where the aggregate amount of premium paid under all such policies (except Ulip) does not exceed Rs 5 lakh in a financial year during the lifespan of the policy.
Though there are no rules as yet, given that the proposed wording is in line with the existing wording for a Ulip policy, it can be expected that policies with premium up to Rs 5 lakh in a financial year during the lifespan of the policy would continue to enjoy the exemptions.
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Life insurance companies mushroomed in India post reforms in FDI policies and so did their offerings . Apart from a term insurance policy, endowment policy, unit linked insurance policy (Ulip), pension policy and combinations thereof have been offered by life insurers.
Over a period of time, the structure of life insurance products underwent a sea change. Investment products started masquerading as a life insurance policy, enjoying the same tax benefits as that of the humble life insurance policy to make it lucrative to not only the aam aadmi but also to high networth individuals. These products became attractive not only on account of the returns they offered, but also because of their ‘tax free’ status as existed in the Indian income tax law.
Noting such change in investment behaviour and to incentivise pure insurance products focussed on life insurance, the government has brought in amendments in the recent past to restrict such exemption to products which require premium payments below a prescribed threshold (premiums more than 10% of sum assured do not enjoy tax exemption now).
In fact, Ulips were also carved out and a separate tax regime to tax them was introduced in the recent past subject to premium exceeding Rs 2.5 lakh in any financial year during the term of such policy. As long as the percentage of premium paid was not more than 10% (20% for policies issued up to March 31, 2012) of the sum assured, everything remained kosher, and the exemption status of the sum assured was not questioned by the tax authorities.
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Maturity of policies
Upon maturity of such policies which would no longer enjoy the exemptions, the said income would be taxed as income from other sources in the hands of the taxpayers. The proposed amendment also clarifies that a deduction of premium paid on such policies would be available to the taxpayer if deduction of such premium has not been claimed hitherto. It is also interesting that this deduction of premium has been proposed in a manner which would enable taxpayers to also claim such deduction for other such policies in which exemption was not granted earlier, which is a much welcome step.
The Budget proposals seek to curb the exemption benefit on high premium investment policies under the garb of insurance. The course correction attempted seems to leave little leeway to gain a tax advantage from life insurance of Ulips for wealthy taxpayers.
The writer is partner, Nangia Andersen LLP. Inputs by Siddhesh Khandalkar