India imposes new tax exemption rule on policies amounting to more than INR500,00

This could negatively impact traditional insurance policies.

The Indian government recently introduced a new tax rule for life insurance policies where an annual premium exceeding INR 500,000 ($6,029) will be subject to taxation. 

This has significant implications for policyholders, particularly those with high-premium policies, as expressed by the India Briefing.

This encompasses not only the sum assured but also bonuses and other benefits. 

The implementation of this tax rule has the potential to alter the attractiveness of traditional insurance plans, especially for risk-averse investors seeking guaranteed returns on their investments. 

With the new tax regulation in place, the returns from these plans will be subject to taxation, potentially diminishing their appeal.

Additionally, the rule applies to situations involving multiple policies. 

If the combined annual premiums across all policies surpass INR 500,000 within a fiscal year, the cumulative maturity amount from all these policies will be subject to taxation.

In contrast to the previous framework, which provided exemptions under section 10 (10) of the Income Tax Act for specific sums received from life insurance policies, including bonuses, the newly introduced guidelines by the Central Board of Direct Taxes (CBDT) render these exemptions obsolete. 

This change has implications for the taxation of life insurance policy payouts and may impact the decisions of individuals considering insurance policies.

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The revised taxation framework includes two significant exceptions that impact the taxation of life insurance policy proceeds:

• Policyholder's Demise: The new tax rule grants an exemption for proceeds received from a life insurance policy in the event of the policyholder's demise. This means that if the policyholder passes away, the amount received by beneficiaries will not be subject to taxation.
• Unit-Linked Insurance Plans (ULIPs): The revised tax regulations do not apply to Unit-Linked Insurance Plans (ULIPs). ULIPs retain their exemption status, meaning that the proceeds from these plans will continue to be tax-free.

However, the changes introduced by the new tax framework are expected to have a potential negative impact on traditional insurance plans such as endowment, money-back, and retirement plans. 

These plans are typically preferred by risk-averse investors seeking guaranteed returns on their investments. With the new tax rules, the returns from these plans will now be subject to taxation, potentially reducing their attractiveness to investors.

(INR1.00 = $0.012)