Window for unlimited investment in insurance policies with tax-free return closes on March 31
Feb 3, 2023
Synopsis
As per budget 2023 proposal if you invest in any non-linked saving policy of a life insurance company in the next financial year, the maturity proceeds will not be completely exempted from tax if the policy has a premium of more than Rs 5 lakh a year. There is limited window left for such investments.
As of now,all your investments in non-linked insurance policies are eligible to be completely tax-free return, subject to a set rules of ratio related to premium and sum insured. However, this will change from the next financial year as Budget 2023 has put a cap of Rs 5 lakh on the premium of such non-linked policies that would be exempted from tax on maturity proceeds.
"Traditional insurance policies with yearly aggregate premiums above Rs 5 lakh will not gain a tax advantage. The returns of these policies will be taxed as per an individuals' tax slab except in case of demise," says Sanjib Jha, Chief Executive Officer, Coverfox Group.
What this means is that if you invest in any non-linked saving policy of a life insurance company, the maturity proceeds will not be exempted from tax if the policy has a premium of more than Rs 5 lakh a year.
Policies sold until March 31, 2023, are outside the scope of this proposal; so those would not be impacted. Not only this, if you purchase these policies before this date, the individual will keep enjoying the tax exemption on future premiums as well.
The government’s intention seems to be to prevent avenues that allow tax-free maturity proceeds. It had earlier imposed a cap on unit-linked insurance plan (ULIP) investment and is now taking this initiative towards traditional plans from next year. "This may lead to an increase in the purchase of term insurance policies that are pure-life insurance policies without the element of savings," says Jha.
For high net-worth individuals (HNIs) and people falling in the highest income-tax bracket, traditional insurance policies have been a good avenue to generate decent post-tax return through debt investments. For instance, if they invest in a fixed deposit (FD) and get 7% return, their effective post-tax return comes down to 4.9%. However, if they get any return above 6% on these policies, which are completely tax free, then they end up generating a higher post-tax return.
The number of investors who go for such high-value premiums is very limited. Even the Rs 5 lakh annual premium capmay work well for many people falling in the highest income-tax bracket while making an investment in these policies next year. “Max Life has a well-diversified product mix across products and customer segments, and our share of business from customers with the impacted non-unit linked policies with annual premium of above Rs 5,00,000 is approximately ~9% of individual APE for 9M FY23 and was ~6% for FY22. We don’t expect this sale to completely disappear as among many levers, such as shifting to lower ticket size and alternative products, we are confident of retaining a significant portion of the sale,” says Prashant Tripathy, CEO & MD of Max Life.
A similar exercise in ULIP did not result in a drop in sales of those plans. “You will recall that in the budget of 2021, a similar exemption was withdrawn for ULIPs with ticket size more than Rs 2.5 lakh, and after that we did not see any material impact even on the share of high-ticket ULIPs. Further, the VNB impact will be marginally lower than the sales impact as such high-ticket size policies do operate at lower margins,” adds Tripathy.
[The Economic Times]
