An individual can avail tax deduction on the amount spent during the year on a deferred annuity for self, spouse, or child.
The tax-saving season is underway. Many people would be planning to buy an insurance policy in the next few days.
They should familiarise themselves with the rules associated with availing tax benefits on insurance policies, especially after the changes in the Union Budget 2023.
The change
The proceeds from life insurance policies were exempt from tax under Section 10(10D) of the Income-Tax Act, irrespective of premium amount, provided certain conditions were met.
From April 1, 2023, maturity proceeds on premiums exceeding Rs 5 lakh annually are subject to taxation.
"This will not affect the tax exemption provided to the death benefit. It will also not affect insurance policies issued until March 31, 2023," says Ritika Nayyar, partner, Singhania & Co.
This rule applies primarily to traditional plans, which are non-unit linked, insurance-cum-investment plans.
Suppose that a person owns three such policies, each with a premium of Rs 2 lakh. Cumulatively, the premium exceeds the limit of Rs 5 lakh.
"The policies having a total premium of Rs 5 lakh or less will continue to enjoy tax exemption at the time of redemption. In this example, the proceeds from only one policy will be taxed," says Ankit Jain, partner, Ved Jain & Associates.
Rules for Ulips
Ulips, too, have a ceiling on the premium amount, above which the maturity proceeds become taxable.
"If the total premium paid for all Ulips in a given fiscal year exceeds Rs 250,000, the maturity proceeds will be taxed. Otherwise, Ulips retain their tax-exempt status," says international tax lawyer Adithya Reddy.
This applies to policies issued after February 1, 2021. Again, if one policy has a premium of Rs 2 lakh and another has a premium of Rs 60,000, proceeds from only the second policy become taxable.
Tax treatment at investment stage
Non-Ulip policies, Ulips, deferred annuity schemes, and immediate annuity plans are all eligible for deductions under Section 80C up to a limit of Rs 1.5 lakh in a financial year.
Non-Ulip policies: Taxpayers are eligible for deduction under Section 80C on premiums paid for term policies and traditional policies.
"This deduction, however, is contingent upon the premium not exceeding 10 per cent of the policy's sum assured, ensuring that tax benefits go to policies designed for genuine insurance coverage rather than high-value investment schemes," says Jain.
Ulips: They are also eligible for tax deduction up to Rs 150,000 under Section 80C and Section 80CCC.
"While you can invest a higher amount, the total Ulip tax deduction is capped at Rs 150,000 per annum," says Rajarshi Dasgupta, executive director, AQUILA.
Deferred annuities: A deferred annuity plan offers a cash stream during retirement.
An individual can avail tax deduction on the amount spent during the year on a deferred annuity for self, spouse, or child (dependent or independent).
"The deduction shall be allowed if the contract does not provide an option to the insured to receive cash payment from a deferred annuity," says Naveen Wadhwa, vice president, research and advisory, Taxmann.
Immediate annuity: Amounts invested in immediate annuity plans are also eligible for deduction under Section 80C.
"The deduction is available to an individual when he invests in the annuity plan in his name, not if it is in the name of the spouse, children, parent, or any other family member," says Wadhwa.
Select with care
Consider buying insurance in the name of your spouse or children, as the Rs 5 lakh tax exemption limit applies to each individual, meaning the maturity proceeds they receive will be tax-free, and income clubbing rules will not apply.
Ensure your annual premium doesn't surpass the tax exemption limit.
"Staying within the maximum eligible amount ensures the maturity proceeds remain tax-exempt," says Nayyar.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
