For someone opting for the New Tax Regime, the Section 80C tax benefit will not be available even on existing life insurance policies.
Income Tax Exemptions and Deductions: With the New Tax Regime set to become an optional exercise for personal income tax purpose, taxpayers will soon be facing conflicting situations. Even if someone opts to switch to the New Tax Regime in the financial year 2020-21 by foregoing income tax exemptions and deductions, they may remain in a quandary whether to continue with investments that have a regular commitment.
The regular premium paid towards life insurance policies is one such investment that comes with tax benefit under the Section 80C and requires the policyholder to keep paying the premium until the end of the term of the policy.
In the New Tax Regime, no such benefit will be available on the premium paid and this will be true for both the existing and new policies.
So, with the Section 80C tax benefit not available even on the existing policies, what should policyholders do in the New Tax Regime?
Here are a few things policyholders may consider before deciding:
- Other than public provident fund(PPF), no other popular investment option offers tax benefit. Life insurance still continues to offer tax-free corpus and a life cover for the desired term.
- Existing policyholders may also have to look at the surrender charges if they wish to discontinue their policies. The surrender value will depend on the premium paid for the number of years. As life insurance policies are front-loaded with costs, an early surrender will cost heavily.
- The other option could be to make the policy paid-up, with a reduced life cover. In doing so, one will not have to pay future premiums but will get the maturity value only at the end of the original term.
- In the case of Ulips, one has to pay a premium for a minimum period of 5 years. Any surrender immediately after the end of the lock-in period may not be fruitful as costs in Ulips are also front-loaded.
- Also, the switch from old to new tax regime and back to the old regime is allowed for salaried individuals. In future, if you opt to switch back to the old regime, any discontinuance of life insurance policies could be equally damaging.
In the case of both traditional life insurance policies ( endowment, money-back plans) and unit-linked insurance plans (Ulips), the maturity proceeds remain tax-free as per the current tax laws. To enjoy Section 10(10D) tax benefit i.e. tax-free maturity, the sum assured (life cover) needs to be at least ten times of the premium.
A term insurance policy that comes with high-cover at a lower cost (premium) remains the best way to insure oneself. For those conservative individuals who want to keep saving and insurance combined, albeit, for a lower return may continue to opt for traditional plans. And, those who wish to combine savings and insurance and are comfortable with market-linked investments (equity, debt) may choose Ulips of life insurance companies.
So, should a policyholder continue paying premium after opting for NTR? For someone who has bought a life insurance policy purely for saving tax, the answer could be simple. But, remember, the tax benefit is only incidental to any tax saving investment including life insurance plans. For anyone with financial dependents, a life cover is a must which acts as an income replacement tool for the family.