Life Insurance Policy amendments: Budget 2023

Income Tax Tax Savings & Deductions
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What makes insurance popular?

The answer is simple. One is that it provides financial security to the person and their family. At the same time, it’s a tax-saving opportunity as the premiums paid are deductible while filing.

Also, under section 10(10D) one can claim a tax exemption on the amount received under a life insurance policy at maturity if the policy is taken after 01/04/2012 and the premium paid on such a policy does not exceed 10% of the sum assured value. (20% if the policy is taken before 01/04/2012.)

The objective exemption u/s 10(10D) was to benefit the small and genuine cases of LIC.
Hence, to minimize the misuse of such exemption, the FM in the budget 2023 announced the below-mentioned change.

Budget 2023 announcement:

If aggregate of premium per PAN for life insurance policies (except ULIP) issued on or after 1 April 2023 exceeds ₹5,00,000 in a financial year, then income on maturity shall be taxable from those policies.

What are the exceptions to it?

This provision shall not affect the insurance policies issued till 31 March 2023. Also, in the event of a death of a person insured, the tax exemption will be available on the amount received.

The proceeds from only those policies issued on or after 1st April 2023, whose aggregate premium is up to ₹5,00,000, shall be exempt.

A few points:

  • The net income received (redemption value- premium paid) on the maturity of such life insurance policies shall be chargeable under “Income from Other Sources”
  • The deduction on premium under section 80C shall be allowed every year, provided the premium is up to 10% of the sum assured value where the policy is issued after 01/04/12 and 20% for the policy issued before 01/04/12.
  • For policies issued on or after 1st April 2023, the aggregate premium of all life insurance policies should be considered.
  • If the maturity amount exceeds the limit of ₹1,00,000 in a financial year, then the insurer is liable to deduct TDS under Section 194DA at 5% on the net income

Have doubts? Shoot’em here! Our experts are here to answer.

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Let’s try to understand this with a few examples.

Example 1:

Niyati, aged 35, is a salaried individual. She has a gross salary of ₹10,00,000.

She has also received proceeds of ₹25 lakhs from a life insurance policy she had taken on 20 April 2012. She has paid a total premium of 20 lakhs (2 lakhs per annum) for this policy for 10 years.

What shall be the tax implications of this under the old regime & new regime as per Budget 2023?

Solution:

Calculation of Niyati’s tax liability

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From the above table it can be inferred that even after claiming the deduction under the old regime, the tax liability happens to be more.

Also, when she receives the maturity proceeds, TDS at 5% shall be applicable as the maturity amount exceeds ₹1,00,000. The difference amount (ie, ₹5,00,000*5%) she can claim as tax credits while filing her ITR for that particular year.

Example 2:

Bharti, who is 30 years old, is involved in the business of clothing. She is also planning to purchase a few life insurance policies as under:

Policy No. Annual Premium (in ₹) Sum Assured (in ₹)
1 2,00,000 20,00,000
2 2,50,000 25,00,000
3 75,000 7,50,000
4 2,00,500 25,00,000
5 1,75,000 25,00,000

What shall be the tax implications of this as per the budget 2023?

Solution:

From the above table, it can be observed that the total premium paid in a financial year by Bharti is ₹9,35,000 on 5 insurance policies.

As per the budget 2023 announcement, income from only those insurance policies will be exempted whose aggregate premium does not exceed ₹5,00,000. So, she can choose from various options to claim tax-free income as follows:

  1. Income/Maturity procees from policies 1+2/ 1+3+5 whose total premium amounts to ₹4,50,000, which does not exceed ₹5,00,000. So, policies 3, 4, & 5/2 & 4 will be taxable.
  2. Income/Maturity procees from policies 2+3+5 whose total premium amounts to ₹5,00,000, which does not exceed ₹5,00,000. So, policies 3 & 4 will be taxable.
  3. Income/Maturity procees from policies 3+4+5 whose total premium amounts to ₹4,50,500, which does not exceed ₹5,00,000. So, policies 1 & 2 will be taxable.

There could be many other combinations as per Bharti’s choice which can be decided on the basis of her income and maturity proceeds.

If she opts for policy 1 and policy 2, as in this case, the income shall be 45,00,000 and the premium paid will be covered u/s 10(10D).
Maturity proceeds from the insurance shall fall under “Income from Other Sources and shall be taxed at slab rates.

She is also eligible to claim a deduction of up to ₹1,50,000 u/s 80C for the premium paid towards life insurance policies if she opts for the old regime. The deduction for the premium amount is allowed to be up to 10% of the sum assured.

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life insurance premium up to rs.1.50 lakhs is allowed in old tax regime !
is it also allowed in new tax regime ?
@Shrutika_Shah
@Sakshi_Shah1
@CA_Niyati_Mistry

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Hey @HIREiN,

No, the deduction is not allowed under the new tax regime.

5

is the contribution made to sukanya samridhi yojan (SSY) ; allowed in the new tax regime?

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@HIREiN,

Investments made in SSY are eligible for deductions u/s 80c. As all chapter VI-A deductions including deductions u/s 80C are disallowed in the new regime, contribution made to SSY will also be disallowed.

7

Hi @HIREiN

Nope, contribution made to SSY scheme is not allowed as a deduction under new tax regime.

You can refer to the below article for more details:

Section 115BAC - Understanding the New Tax Regime

Thank you.