The income tax benefits under Section 10(10D) have been restricted to those paying life insurance annual premiums below Rs 5 lakh. The government’s intention is simple. You can not keep on buying insurance policies only for the sake of tax-free maturity benefits.
While you are free to buy as much life insurance as you can (so long as financial underwriting norms permit), you have to pay tax on the returns (maturity claim amount minus premiums during the term) you get at the end of the term. In case the policy results in death claims, no tax will be deducted from the claim amount. So, from the viewpoint of pure protection, there is no issue as the nominee does not have to pay a single rupee no matter how large the death claim proceeds. But, when one survives the policy term, the maturity amount will be taxed at the appropriate rate.
High value insurance
If the main reason for policyholders buying high value insurance products is providing financial security to loved ones in case of their premature death, then there is no problem at all. Death claim proceeds will not be taxed. But one important objective for purchasing these policies is to avail the benefits of Section 10(10D) at the end of the policy term. While underinsurance always lands a family in trouble, over-insurance can equally affect your interest if you intend to use life insurance purely as a tax saving instrument.
Also read: New Income Tax Return Forms for AY 2023-24 notified by CBDT: ITR 1-6, ITR-V details here
Since, every person has to die some day for sure, a whole life insurance product can be given serious consideration by those who have investable surplus but want to invest the money in a safe instrument. That will be highly tax efficient for passing on wealth to the progeny.
High net worth individuals (HNIs) do not have much problem in meeting the basic expenses of life after retirement from active working life. So, they need not depend too heavily on maturity claim amounts. They are capable of keeping whole life policies in force. Endowment type policies suit the interests of middle-class Indians who can build a tax-efficient savings corpus through a contractual savings plan.
Insurance should be purchased for the sake of managing risks of either premature death or meeting various expenses at particular life stages. If that purpose is served through life insurance products, then life insurance has played its role. People should focus on buying the right products and from the right insurance companies.
If HNIs live a long life to receive the policy money on the date of maturity, they should not mind if they have to pay some taxes on the maturity claim amount. If one is paying Rs 5 lakh per annum, he must be earning many times more annually. So, this taxation is not likely to significantly affect the financial wellbeing of the rich.
LIFETIME OF BENEFITS
* Over-insurance can affect your interest if you intend to use life insurance purely as a tax saving instrument
* Endowment policies suit the middle-class who can build a tax efficient savings corpus through a contractual savings plan
The writer is an insurance industry analyst