If the proposals of the Finance Bill, 2012, are accepted, then from this month when you buy an insurance policy, you will need to ensure that the sum assured or death cover is at least 10 times the annual premium to be able to enjoy tax deduction benefits. Also, benefits other than death benefit, such as maturity proceeds, would be tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.
Difference in tax incidence
Until the previous financial year, the sum assured needed to be only five times the premium in order to enjoy tax benefits under section 80C and section 10(10D) of the Income-tax Act.
Section 80C: Under section 80C, premiums paid towards a life insurance policy qualify for a tax deduction up to Rs1 lakh. Until last year, if the premium paid in a fiscal for a policy was in excess of 20% of the sum assured, then tax deduction was allowed only for premiums paid up to 20% of the sum assured.
This year, the premium should be not more than 10%.
Section 10(10D): As for the maturity benefit, according to section 10(10D), the maturity proceeds was also tax-free if the premium was not more than 20% of the sum assured or the sum assured was at least five times the premium paid. From this year, the sum assured needs to be at least 10 times the premiums paid.
Will the new rules apply to old customers?
The new rules of the game will be applicable only from this month and will not be applicable from retrospective effect. So if you already have an insurance policy, whose sum assured is less than 10 times but more than 5 times the premium, you will continue to enjoy the tax benefits as earlier.
Who will get affected?
The new rules are likely to affect single premium policies that usually have a low sum assured. Investment-cum-insurance policies that are bought by older people will also be hit since the mortality cost of these policies are high. So the sum assured can drop to less than 10 times the premium paid.
What lies ahead?
We have learnt that the insurance regulator has suggested to the ministry of finance that all insurance policies should be allowed to enjoy the 80C benefit. Unit-linked insurance plans already have a minimum threshold in terms of the sum assured and Irda is planning to have a minimum threshold for traditional plans as well. This the industry hopes will take care of the protection element in an insurance policy. For the section 10(10D) benefit, Irda has proposed that the new rule be based on the term and not the sum assured. It has suggested that only long-term policies should be allowed section 10(10D) benefit.
