As per the recent proposal in the Union Budget 2023, maturity proceeds of all life insurance policies (other than unit-linked insurance policies or ULIPs) that are issued after April 1, 2023, and have an annual premium of more than ₹5 lakh, will now be taxable as per the applicable tax slab.
Guaranteed income products are one of the best investment products when it comes to tax benefits and assured returns. Because of its multiple benefits for the investors, it is one of the best-selling products of the life insurance companies.
The recent hikes in interest rates by RBI has made this product even more attractive with yield on maturity proceeds increasing even further. This product is more like an investment product which also gives you insurance coverage.
Since, there is an insurance cover also, it qualifies for tax deduction on annual premium paid under Section 80 C of the Income Tax Act and tax exemption on the maturity proceeds under Section 10 (10D).
The pre-tax yield in some of these schemes is above 9% making it one of the best products for investors looking for assured returns as there is no market-linked risk involved in this product.
However, the Union Budget tabled in the parliament on 1st February 2023 has proposed to tax the maturities proceeds as per the applicable tax slab if the annual aggregate premium on all income bearing insurance policies is above ₹5 lakh.
Initially, this came as a shock for not only high net worth individuals but for the insurance companies as well. In this article, we will see that the actual impact of the change in the tax applicability has very limited impact.
However, before we discuss the actual impact of the budget proposal on various categories of investors, there are two important aspects that every investor should know.
First, the recent budget proposal has not touched upon the tax deduction benefit of upto ₹1.5 lakhs that one can avail for such products under Section 80 C of the IT Act. Therefore, every investor of such a product can continue to avail this tax deduction benefit on such products including guaranteed income products. It may be noted that this tax deduction benefit is available for only those investors who have opted for the old tax regime.
Second, the said proposal will become effective from 1st April 2023 which means that if someone buys a guaranteed income product on or before 31st March 2023 and if the aggregate annual premium on all such income based products is above ₹5 lakhs then also the maturity proceeds are tax exempted.
So, any investor who wants to invest more than ₹5 lakh in such products like guaranteed income products, can avail the tax exemption benefits on full maturity proceeds by making investment on or before 31st March 2023.
Let us now understand the impact of the budget proposal under various scenarios.
1. Your aggregate annual premium on income-based insurance policies is less than ₹5 lacs.
There is no impact on you of the recent budget proposal and you will continue to get all the tax benefits including tax exemption on maturity proceeds.
2. Your aggregate annual premium on income-based insurance policies is more than ₹5 lacs and your annual net taxable income is under 10% tax slab.
This means that the maturity proceeds will be taxable at 10% only. For example, if your annual maturity proceeds is ₹6,00,000. Then you will have to pay ₹60,000 as tax and your net annual maturity amount would be ₹5,40,000.
3. Your aggregate annual premium on income-based insurance policies is more than ₹5 lacs and your annual net taxable income is under 20% tax slab.
This means that the maturity proceeds will be taxable at 20% only. For example, if your annual maturity proceeds is ₹6,00,000. Then you will have to pay ₹1,20,000 as tax and your net annual maturity amount would be ₹4,80,000.
4. Your aggregate annual premium on income-based insurance policies is more than ₹5 lacs and your annual net taxable income is under 30% tax slab.
This means that the maturity proceeds will be taxable at 30%. For example, if your annual maturity proceeds is ₹6,00,000. Then you will have to pay ₹1,80,000 as tax and your net annual maturity amount would be ₹4,20,000.
It may further be noted that a large percentage of taxpayers in India fall under the 10% tax bracket, which means that the impact of the tax applicability on maturity proceeds in income based insurance policies is very limited. Even those who are getting a bit impacted i.e. whose aggregate annual premium is above ₹5 lacs, they can invest before till 31st March 2023 and get full tax exemption on maturity proceeds.
It may be noted that tax exemption on maturity proceeds on income-based insurance products is available under the old tax regime as well as the new tax regime.
Looking at the current yield offered by guaranteed income products and the very limited implication of tax on maturity proceeds as explained above, it still remains a very attractive investment option for people to create a corpus or get guaranteed annual payout and plan their retirement.
Mukesh Vijayvergia, Founder of Nishkaera Financial Advisory and Wealth Management Private Limited
