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Business News/ Money / Personal Finance/  Tax exemption on insurance policies with total premium up to Rs 5 lakh: Different scenarios explained
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Tax exemption on insurance policies with total premium up to Rs 5 lakh: Different scenarios explained

I-T department recently issued a circular that shared different details regarding the provision 10D of section 10 of Income Tax (I-T) Act with regards to exemption against the income accrued from multiple insurance policies

From April 1, 2023, only insurance premium up to Rs 5 lakh are exempt from income tax. Premium
From April 1, 2023, only insurance premium up to Rs 5 lakh are exempt from income tax.

With effect from April 1, 2023, assured sum received from insurance policies with premium of more than Rs five lakh will not be exempt under income tax. However, any income accrued from policies with total premium up to Rs 5 lakh will continue to be exempt.

But have you ever thought as to what would happen if a policyholder buys multiple policies with premiums ranging between Rs 1 lakh to Rs 3 lakh and the total premium crosses Rs 5 lakh? And what if one of the policies is a ULIP? What if different insurance policies are bought in different years?

To answer all these queries, and more — the income tax department has released a circular that shares further details regarding clause 10D of section 10 of I-T Act. There are, meanwhile, a number of other scenarios that determine the applicability of this provision.

We untangle some of the factors here:

Will ULIP plans be covered?

The unit linked insurance plans (ULIPs) are not to be covered under Rs 5 lakh limit as they are already governed by the existing Rs 2.5 lakh limit.

What if you bought multiple insurance policies?

When a policyholder buys multiple policies during a year, s/he can take exemption for all of them so long as the total premium for these policies stays under Rs 5 lakh.

A. The policy that tips the total premium beyond Rs 5 lakh is not covered. Policyholders can decide which policy to cover and which one to ignore.

B. While sharing an example, the income tax department document states that the annual premium for policy A is Rs 4.5 lakh, and premium for policies B, C and D are Rs 1 lakh, 1.5 lakh and 6 lakh.

C. In this particular case, policy A was bought on April 1, 2023 and the remaining three were bought on April 1, 2024.

D. So, as per the latest rules, consideration received against the first policy will be exempt from income tax under section 10(10D) of the Income Tax Act, and not for any of the remaining three policies because that would lead to insurance premium surpassing Rs 5 lakh.

Can you choose a combination of policies that suits you?

The short answer is ‘yes’. The circular shares another example of a customer who bought different policies A, B, C and D. the first one is bought on April 1, 2023 and the remaining on April 1, 2024.

The premiums paid on these policies stood at Rs 2.5 lakh, Rs 2 lakh, Rs 2.5 lakh and Rs 6 lakh.

Now, the customer can opt for policies A and C for claiming exemption because the sum total of premium would stand at Rs 5 lakh.

S/he can opt for A and B also, but since the combination of A and C is more beneficial since one can exhaust the entire Rs 5 lakh premium exemption -- one is entitled to use this.
 

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Why should you file ITR even with no taxable income:

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Published: 30 Aug 2023, 09:21 AM IST
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