Simplified Laws Guide to Taxation and Legal Concern Mr Akasha purchased a Life Insurance policy for Rs.5 Crores with an annual premium of Rs.50 Lakhs. After ten years, in 2033, he will get a maturity value of Rs.11 Crores. What is the taxation on the gain of Rs.6 Crore in the hands of Akasha?
- If the Insurance policy issued up to 31st March 2023 – Rs.6 Crore (Rs.11 Crore of maturity Less Rs.5 Crores of premium paid) is exempt from tax u/s 10(10D) of the Income Tax Act.
- If the Insurance policy is issued on or after 1st April 2023 – The changes proposed in Budget 2023 – Rs.6 Crore is taxable in the hands of Akasha as per the tax rates applicable at the time of maturity. (Tax outgo of Rs.2.34 crore!)
This amendment will make a big hole in the pockets of individuals taking hefty Insurance policies. However, any amount received upon the death of the insured will continue to be tax-exempt. Further, all the policies taken up to 31st March 2023 will also be tax-exempt irrespective of the maturity value.
Why is this amendment done?
The intent is evident if you look at the amendments and changes brought in by the present Government under different laws over the last couple of years. The wealthy section of society has to sacrifice or give away subsidies, exemptions, deductions, etc. If the high-net-worth or so-called “haves” pay a little more, it will benefit the “have-nots”! or use it to build public infrastructure.
With this background, the exemptions and deductions are being removed one after the other. Removal of Tax exemption (for high investments) on ULIP, EPF, Life Insurance, Capital Gain, or Gas Subsidy, etc., are all part of such an initiative.
Suppose Ms. Bhoomi wants to take an insurance policy with an annual premium of Rs.2 lakhs for ten years. She gets a maturity value of Rs.40 lakhs. Is the gain of Rs.20 lakhs taxable? No. The Government has given exemption from taxes if up to an aggregate premium paid per year per person is less than Rs.5 lakhs. In other words, the maturity value is taxable only in such cases where the annual premium paid by a person is more than Rs.5 lakhs.
What if Ms Bhoomi has multiple insurance policies, where the total premium from all the policies together exceeds Rs.5 lakhs per year? In this case, the gain on maturity is taxable because to get tax exemption, the aggregate premium paid (from all policies together) should be less than Rs.5 lakh per year.
I hope this is clear.
Is it a good idea to buy Insurance policies in the changed scenario?
Even though Life Insurance policies are not a great investment option, to earn an assured return by hedging against risk, people still prefer Life Insurance coverage. However, in the future, i.e., from April 2023, it won’t make sense to purchase life insurance policies from a return on investment perspective.
Instead, consumers should opt for vanilla Term Insurance policies. The premium is less, and the life coverage is high. For investments, one can look at better options like mutual funds, bonds, etc.
I will post more analysis in the coming days.
