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.
However, 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 new rule does not affect insurance policies issued till March 31 this year.
So, should individuals lock tax-free maturity returns now?
“My recommendation would be no. 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.
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.”
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.
"Any proceeds out of pure term insurance continue to be totally exempt from tax. Tax exemption is withdrawn only on insurance-cum-investment options as we cannot allow insurance to become an investment," said Revenue Secretary Sanjay Malhotra during a post-Budget interaction with CNBCTV18.
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Source: Moneycontrol
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