Beware! Insurance agents pushing high-premium policies before March 31 to escape tax – Moneycontrol
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With Budget 2023-24 removing tax exemption on insurance policies bought after March 31 with an aggregate premium above Rs 5 lakh, some agents and banks have started to push such policies before the financial year ends.
Experts said it is likely that insurance companies and brokers are on an overdrive with sales pitches suggesting individuals lock tax-free maturity from insurance investments before April 1, 2023, when the budgetary proposals are scheduled to come into force.
Buying these policies would be a mistake.
The new rule
In her budget speech on February 1, finance minister Nirmala Sitharaman said the maturity sum from traditional insurance policies where the aggregate premium for policies — other than unit-linked insurance plans (ULIPs) — issued on or after April 1, 2023, is above Rs 5 lakh, will not be exempt from tax. The move is aimed at limiting income tax exemption from proceeds of insurance policies with very high value.
Also read | Check out Moneycontrol’s curated list of 30 investment-worthy mutual fund schemes
Further, the tax exemption on the ‘aggregate premium’ of Rs 5 lakh and above in a year has been removed, meaning all premiums for traditional policies bought only after March 31 will be considered for the new taxation rule.
Notably, the government’s move will not affect the tax exemption provided to the amount received on the death of the person insured. In simple words, if the policyholder dies, the nominees will not be required to pay any tax.
The new rule does not affect insurance policies issued till March 31 this year.
Escaping the sales pitch
So, should individuals lock tax-free maturity returns now?
“My recommendation would be no. One, because endowment policies generally have a low rate of return. So, one should think about whether it is the right way to buy insurance. There could be other alternative ways for investment,” said Abhishek Bondia, managing director of SecureNow.in, an insurance broker. “Second, it never makes sense to rush into an investment. You should make it depending upon what your liquidity and investment priorities are.”
Also read | Budget 2023: Tax exemption removed in insurance policies with premium over Rs 5 lakh
Experts said investment-based insurance policies typically tend to yield lower returns than a pure-term cover for a similar amount plus investing the balance amount in a mutual fund.
Melvin Joseph, founder of Finvin Financial Planners, said that even with tax benefits, life insurance investment is not at all a good option.
“Now without tax benefits, it looks a whole lot more of a bad option,” Joseph said. “For example, an NRI returning to India, whose retirement corpus is Rs 4 crore, she may invest, let’s say, in products such as Sanchay Plus, which guarantee around 6% returns. However, for a typical Indian investor, these instruments don’t make much sense.”
Also read | Four classic insurance traps you must avoid
The expert suggested that a normal investor should stay away from insurance-linked investment products because of the low return and the lack of flexibility while paying and withdrawing.
Separating investment from insurance
In recent years, the government has tried to plug the tax arbitrage that high net worth and rich investors have been taking to escape paying tax that they would otherwise pay if they invest in other avenues, say a mutual fund, at redemption or maturity.
For instance, Budget 2021 removed tax exemption for ULIPs with a premium of up to Rs 2.5 lakh. At the time, it also made interest from provident funds taxable in the hands of investors where the annual contributions exceeded Rs 2.5 lakh annually.
The government also recently suggested that there was a need to separate investment from insurance.
Also read | Budget insurance move is about taxing investments, says revenue secretary
“The tax exemption is being withdrawn on investments. Any proceeds out of pure term insurance continues to be totally exempt from tax. It’s only where insurance beyond a particular point becomes more of an investment rather than an insurance, there we have removed exemption. We cannot allow insurance to become investment,” said Revenue Secretary Sanjay Malhotra during a post-Budget interaction with CNBCTV18.
Experts said that one area where investors could leverage investment-based insurance policies was tax-free returns, which will no longer be available post the budget announcement.
“Policies with a higher premium would no longer yield the advantage that they used to, paving the way for other insurance instruments to gain some traction. One of the purposes the government has imposed restrictions on investment-based insurance could be to promote pure insurance policies like term plans and at the same time tax high-income earners,” said Bharat Phatak, director of Scripbox.
ULIPs also can be considered for some long-term goals, but only after a rational and objective comparison with mutual funds, he suggested.
Also read | Economic survey: Insurance penetration improves, but most buy savings-linked
Meanwhile, the government clarified that removal of tax-free status is about taxing large investments under such policies, not the insurance itself.
Individuals opt for life insurance policies as they not only give cover but also offer certain tax benefits.
Under Section 80C, premiums paid towards a life insurance policy qualify for a deduction up to Rs 1.5 lakh. Earlier, Section 10 (10D) made income on maturity tax-free if the premium is not more than 10 percent of the sum assured or the sum assured is at least 10 times the premium.
Now, insurance policies, except ULIPs, will get taxed if, in any year, the premiums for all such policies exceed Rs 5 lakh.
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