scorecardresearchLife insurance packaged as a tax saving instrument? Avoid falling into

Life insurance packaged as a tax saving instrument? Avoid falling into this trap, say wealth advisors

Updated: 20 Feb 2023, 09:58 AM IST

As proceeds from high value traditional insurance policies will be entitled to tax from April 1 — brokers are reportedly pitching schemes hard as the deadline for the new rules looms closer

: Insurance policies that are issued before Mar 31, 2023 will be exempt from the new rule.

: Insurance policies that are issued before Mar 31, 2023 will be exempt from the new rule.

As the Budget 2023 proposed to do away with tax exemption from proceeds of insurance policies with very high value, financial advisors believe that this could lead to mis-selling, and therefore, investors are supposed to be careful before buying a new policy.

The new rules state that where aggregate of premium for traditional life insurance policies (non-ULIPs) issued after April 1, 2023 is more than 5 lakh; income from those policies will be taxable.

Insurance or tax saving instrument?

It is imperative to note that the policies issued before March 31, 2023 will be exempt from this new rule. This, believe some experts, is triggering mis-selling by insurance brokers.

“The Budget 2023 has announced that investors won’t get tax free benefits on maturity when the amount of premium exceeds 5 lakh. So, now some brokers are urging the HNIs (high net-worth individuals) and ultra HNIs to buy before March 31 insurance policies that have premium of more than 5 lakh so that they can make the most of tax benefit before the new changes come into effect.

“But my recommendation is that one should take an insurance policy only when you need it and not because of tax benefit at the time of maturity. After all, it is not a discount offer that is ongoing,” said S. Sreedharan, a Sebi-registered investment advisor and co-founder of Wealth Ladder Direct.

Amol Joshi, Founder of Plan Rupee Investment Services, concurs and says: “We have always said that in India as well as globally, insurance should not be treated as investment, but as a risk protection instrument. And when you lose tax benefit beyond a certain threshold, it can be seen as one more step towards treating insurance right.”

Only when you need it

It is often emphasised that policy holders should buy an insurance policy only when they need it, and not because it enables them to claim a tax exemption, or some other monetary benefit.

There are also speculations that the mis-selling will happen after the new rule come into effect next fiscal. After all, there are a number of exceptions to the rule and the proceeds will not be taxable in one of the three scenarios: when premium is lower than 5 lakh, when policy holder dies, or when the policy is a ULIP.

But some say that the new rules are yet not clear for insurers.

“The new rule would certainly add to confusion instead of mis-selling. Insurers are supposed to deduct the TDS. An insurer will deduct this tax only when premium is above 5 lakh. Now since the threshold is meant to be computed on a cumulative basis, one would not know whether the limit has already been breached from the policy holder’s side, thus leaving the scope of tax open-ended. So, we will look for more clarity on this,” said Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance.

Common exclusions for insurance policies
First Published: 20 Feb 2023, 09:58 AM IST