The Income Tax Department has made a significant change concerning the tax implications of high-premium life insurance policies. According to a recent circular, if the yearly premium for a life insurance policy surpasses Rs 5 lakh, the sum received from that policy will now be subject to income tax. This development aligns with the budget change announced by Finance Minister Nirmala Sitharaman for the fiscal year 2023-24.
Starting from the assessment year 2024-25, any sum received from a life insurance policy (excluding unit-linked plans) issued on or after April 1, 2023, will not be exempt from tax if the annual premium paid exceeds Rs 5 lakh for any of the preceding years during the policy term.
Previously, individuals were granted an income tax exemption under Clause (10D), Section 10 of the Income-Tax Act, 1961. This meant that sums received from life insurance policies, including bonus allocations, were generally not subject to taxation.
However, the recent legal amendment modifies this situation in the following manner:
1. The income tax exemption will remain valid if an individual pays premiums on multiple life insurance policies (excluding Ulips) issued on or after April 1, 2023, and the total premiums paid do not surpass Rs 5 lakh for any year within the policy term.
2. The exemption will also apply if the sum is received as a result of the policyholder's death.
Back in 2021, the Income Tax Department had already provided guidelines regarding the taxability of Ulips. These guidelines stated that if the premium amount exceeded Rs 2.5 lakh and the policy was issued after February 1 of that year, it would be subject to taxation.
This alteration in tax policy regarding high-premium life insurance policies marks a notable change in the way such policies are treated in terms of taxation. It emphasizes that only under specific circumstances, as outlined above, will the sum received from these policies remain exempt from income tax. This move aligns with the government's broader financial plans and aims to ensure a fair and consistent approach to taxation across different investment and insurance instruments.
FAQs
Q: What is the new tax rule on life insurance payouts?
A: The new tax rule states that the maturity proceeds of life insurance policies issued on or after April 1, 2023, will be taxable if the aggregate annual premium paid by an individual is more than Rs. 5 lacks. This rule applies to all types of life insurance policies, except unit-linked insurance plans (ULIPs).
Q: What are the exceptions to the rule?
A: The rule does not apply to the following:
- Maturity proceeds received on the death of the insured
- Maturity proceeds received on a policy issued before April 1, 2023
- Maturity proceeds received on a policy where the annual premium does not exceed Rs. 5 lakh
Q: How will the tax be calculated?
A: The tax will be calculated on the number of maturity proceeds that exceed Rs. 5 lacks. The tax rate will depend on the individual's income tax slab.
Q: What are the implications of this rule?
A: This rule will impact individuals who take high-premium life insurance policies. They will now have to pay tax on the maturity proceeds of these policies, even if they are received on the death of the insured. This could reduce the overall returns from these policies.
Q: What should I do if I have a high-premium life insurance policy?
A: If you have a high-premium life insurance policy, you should consider the following:
- Review your policy terms and conditions to see if you are eligible for any exemptions from the new tax rule.
- Consider reducing the annual premium of your policy.
- Consider switching to a different type of life insurance policy, such as a ULIP.
Q: Where can I get more information about this rule?
A: You can get more information about this rule from the Income Tax Department website or your insurance company.