The Union Budget 2023 introduced several changes in personal and direct taxes. One of the most talked about changes that was brought in was for the insurance sector. Insurance with premiums above Rs 5 lakh is to be now taxable. Earlier, people used to buy insurance to ensure protection of their families and claim tax, but now that will not be possible.
Let’s get to know about the changes that were announced in the budget and how they may impact you.
Tax exemption benefit on insurance with premium above Rs 5 lakh taken away
In the Budget 2023, it has been proposed to put an upper ceiling on the tax benefits against proceeds from traditional life insurance policies. The proposal is applicable on high-value insurance policies where the aggregate premium during the year exceeds Rs 5 lakh.
So, if your aggregate premium in a traditional life insurance policy (non-ULIP) exceeds Rs 5 lakh, the proceeds of such policies will no longer be entitled to the tax exemption. However, the exemption benefit is taken away only from the proceeds on the policy’s maturity and not from the claim proceeds received on the insured’s death.
Suppose you are an existing life insurance customer with an aggregate premium exceeding Rs 5 lakh during the year. In that case, you need not worry because the proposed changes will apply only to the insurance policies issued on or after 1st April 2023.
If you had planned to purchase a life insurance policy with an aggregate premium of more than Rs 5 lakh in a year, you could do it before 31st March 2023 to save the tax on insurance proceeds in the future.
Adhil Shetty, CEO, Bankbazaar.com, says, “This would help taxpayers get better results with both coverage and investments. Adequate coverage can be attained this way, and tax-saving investment needs can be met through a combination of small savings, provident fund, and ELSS, where the returns and liquidity may both be much better compared to traditional life covers.”
In the past: ULIP with aggregate premium above Rs 2.5 Lac/annum already lost the exemption benefit
Exemption on proceeds of ULIP with aggregate premium exceeding Rs 2.5 lakh in a year was taken away in the Budget 2021. So, now there will be both tax exemption restrictions on ULIP and traditional insurance policies.
If you are an insurance buyer whose aggregate premium is below the applicable ceiling announced in the budget to claim the exemption benefit, you need not worry about it.
Change in the new tax regime makes insurance less attractive as a tax-saving instrument
In the budget 2023 announcement, the new tax regime is made a default tax regime, and the tax slabs have been revised as well. In the new tax regime, the rebate u/s 87A will be applicable for income up to Rs 7 lakh. It means if your income is up to Rs 7 lakh, under the new tax regime, you don’t need to pay any taxes. On the other hand, the 87A rebate in the old tax regime is applicable for income up to Rs 5 lakh only. It means if your income under the old regime is above Rs 5 lakh, you have to invest in instruments u/s 80C, buy health insurance u/s 80D, invest in NPS u/s 80CCD and use similar options to claim the deduction benefit and bring down taxable income below Rs 5 lakh to get the benefit of rebate u/s 87A to save taxes.
Premiums on traditional life insurance schemes are eligible for tax deduction up to Rs 1.5 lakh u/s 80C. But that leads to a lower disposable income in the hands of taxpayers in the old tax regime. Taxpayers whose income is up to Rs 7 lakh will now benefit more by switching to the new tax regime as they don’t need to invest in tax-saving instruments such as traditional life insurance policies to save taxes. Under the new tax regime, taxpayers with income up to Rs 7 lakh will be left with more money than the old tax regime. People with income up to Rs 7 lakh is now expected to focus more on term plan for their life insurance need instead of buying traditional policies for savings taxes.
Insurance is a pure risk-mitigating tool after the union budget instead of a tax-saving instrument.