The income tax department has issued a circular with Guidelines for calculating income-tax exemption on any sum received under a life insurance policy. It is mainly related to the sum received under a life insurance policy, other than a Unit Linked Insurance Policy (ULIP) issued on or after 01/04/2023.
The circular is a 17 page document that includes the provision, guidelines, various situations and examples, you can visit https://incometaxindia.gov.in/communications/circular/circular-15-2023.pdf
The Key Takeaways from the detailed guidelines and what they mean for investors (related to sum received on non-ULIP policies issued on or after 1/4/23) are as under:
- If Premium of a policy is more than 5L per year, any sum received is not exempt from income tax.
- If the aggregate premium of more than one policies is more than 5L, only the policies with annual premium up to Rs. 5L is exempt at investor’s choice. For example if 5 policies with annual premium of Rs. 100,000 (A), Rs. 150,000 (B), Rs. 200,000 (C), Rs. 300,000 (D) and Rs. 475,000 (E), claiming exemption of policies C & D would be most beneficial. However, the investor may choose sum received from policy E as exempt income.
- Any policy matured in earlier years and claimed exempt would be adjusted against remaining policies. Continuing our previous example, if A matures earlier and if that policy is claimed exempt, Policy B & C OR Policy D can be claimed exempt as annual premium (including that of A) would not increase 5L.
- If a new policy is taken (e.g. in 1/4/2028) after premium paying term of earlier policy has ended (FY 23-24 to 27-28) and annual premium of both policies are Rs. 5L, even if the policy is not matured, amount received from both policy would continue to be exempt. The key is annual premium paid on these policies should not be more than 5L.
- GST is not to be considered for calculation of 5L premium amount.
- Premium of Term Life Insurance policy where no payment is made to anyone if insured person survives is not counted for calculating 5L limit.
- Any sum received by the nominee on death of the insured person continue to be exempt from income tax regardless of the plan or policy.
- If the payment from any policy is not exempt, only the premium paid can be deducted from the amount received and indexation is not available. The income is taxed under the head “Income from Other sources” and taxed as per the income tax slab rates.
What To Do - How to buy Insurance Policy Now:
- Do not mix investments with Insurance – Buy Term Life Insurance.
- For ULIP policy issued on or after Feb 1, 2021, ensure that the aggregate annual premium of all ULIP policies does not exceed 250,000.
- For Non-ULIP policies issued on or after April 1, 2023, ensure that the aggregate annual premium of all Non-ULIP policies does not exceed 5L.
While insurance is for the protection and not to be used for investments, without exemption from income tax, insurance as investment does not make sense at all and is even worse.
Please consult your insurance advisor or investment advisor before making any decisions.
