Finance Minister Nirmala Sitharaman, who announced key changes for taxpayers in the Budget 2023, also removed the tax exemptions on income from insurance policies with an aggregate premium of more than Rs 5 lakh.
This has been proposed to limit income tax exemption from proceeds of insurance policies with very high value. “This will not affect the tax exemption provided to the amount received on the death of the person insured. It will also not affect insurance policies issued till March 31, 2023,” the finance minister said.
What’s proposed?
Maturities of life insurance policies with an annual premium of Rs 5 lakh and above taken after April 2023 will now be taxed after Finance Minister Nirmala Sitharaman removed the tax exemptions on them.
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The memorandum to the Finance Bill 2023 said that over the years, it has been observed that several high net-worth individuals are misusing the exemption provided under clause (10D) of section 10 of the Act, according to the news agency PTI report. The exemption is being availed by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies.
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What does it mean for policyholders?
The decision to remove the exemption will make traditional insurance plans, such as money-back or endowment insurance policies, whole life insurance policies, and retirement plans less attractive to policyholders. Such plans do not face return volatility due to non-participation of their premium into stock markets, hence conservative investors find them more attractive, reported Moneycontrol.
"One should note that if an individual has more than one life insurance policy, which is issued on or after the 1st of April 2023 and also if the aggregate amount of premium of such policies exceeds Rs 5 lakh, then the maturity amount will be taxable," PTI quoted Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development Fintoo as saying.
However, the taxation proposal will be applicable only to those policies, which are issued on or after April 1, 2023.
It is to be noted that ULIPs with an annual premium of over Rs 2.5 lakh per year already lost this exemption announced in the 2021 Budget.
The minister also proposed that a TDS at the rate of 20 per cent will apply on the withdrawal of taxable components from Employees' Provident Fund Scheme in case of non-submission of PAN. Currently, such withdrawals attract TDS at the rate of 30 per cent.