Does investing in guaranteed income products still make sense? MintGenie explains

Guaranteed income products are a great option for investors looking for assured returns and tax benefits. The recent budget proposal affects only those with an annual aggregate premium of more than Rs 5 lakh, and they can still invest till 31st March 2023 to avail full tax exemption on maturity proceeds.

Mukesh Vijayvergia, MintGenie Team
First Published3 Mar 2023, 12:53 PM IST
Guaranteed income products are a great option for investors looking for assured returns and tax benefits.
Guaranteed income products are a great option for investors looking for assured returns and tax benefits.

As per the recent proposal in the Union Budget 2023, maturity proceeds of all life insurance policies (other than unit-linked insurance policies or ULIPs) that are issued after April 1, 2023, and have an annual premium of more than Rs 5 lakh, will now be taxable as per the applicable tax slab.

Guaranteed income products are one of the best investment products when it comes to tax benefits and assured returns. Because of its multiple benefits for the investors, it is one of the best-selling products of the life insurance companies. 

The recent hikes in interest rates by RBI has made this product even more attractive with yield on maturity proceeds increasing even further. This product is more like an investment product which also gives you insurance coverage. 

Since, there is an insurance cover also, it qualifies for tax deduction on annual premium paid under Section 80 C of the Income Tax Act and tax exemption on the maturity proceeds under Section 10 (10D). 

The pre-tax yield in some of these schemes is above 9% making it one of the best products for investors looking for assured returns as there is no market-linked risk involved in this product.

However, the Union Budget tabled in the parliament on 1st February 2023 has proposed to tax the maturities proceeds as per the applicable tax slab if the annual aggregate premium on all income bearing insurance policies is above Rs 5 lakh. 

Initially, this came as a shock for not only high net worth individuals but for the insurance companies as well. In this article, we will see that the actual impact of the change in the tax applicability has very limited impact.

However, before we discuss the actual impact of the budget proposal on various categories of investors, there are two important aspects that every investor should know.

First, the recent budget proposal has not touched upon the tax deduction benefit of upto Rs 1.5 lakhs that one can avail for such products under Section 80 C of the IT Act. Therefore, every investor of such a product can continue to avail this tax deduction benefit on such products including guaranteed income products. It may be noted that this tax deduction benefit is available for only those investors who have opted for the old tax regime.

Second, the said proposal will become effective from 1st April 2023 which means that if someone buys a guaranteed income product on or before 31st March 2023 and if the aggregate annual premium on all such income based products is above Rs 5 lakhs then also the maturity proceeds are tax exempted. 

So, any investor who wants to invest more than Rs 5 lakh in such products like guaranteed income products, can avail the tax exemption benefits on full maturity proceeds by making investment on or before 31st March 2023.

Let us now understand the impact of the budget proposal under various scenarios.

1. Your aggregate annual premium on income-based insurance policies is less than Rs 5 lacs.

There is no impact on you of the recent budget proposal and you will continue to get all the tax benefits including tax exemption on maturity proceeds.

2. Your aggregate annual premium on income-based insurance policies is more than Rs 5 lacs and your annual net taxable income is under 10% tax slab.

This means that the maturity proceeds will be taxable at 10% only. For example, if your annual maturity proceeds is Rs 6,00,000. Then you will have to pay Rs 60,000 as tax and your net annual maturity amount would be Rs 5,40,000.

3. Your aggregate annual premium on income-based insurance policies is more than Rs 5 lacs and your annual net taxable income is under 20% tax slab.

This means that the maturity proceeds will be taxable at 20% only. For example, if your annual maturity proceeds is Rs 6,00,000. Then you will have to pay Rs 1,20,000 as tax and your net annual maturity amount would be Rs 4,80,000.

4. Your aggregate annual premium on income-based insurance policies is more than Rs 5 lacs and your annual net taxable income is under 30% tax slab.

This means that the maturity proceeds will be taxable at 30%. For example, if your annual maturity proceeds is Rs 6,00,000. Then you will have to pay Rs 1,80,000 as tax and your net annual maturity amount would be Rs 4,20,000.

It may further be noted that a large percentage of taxpayers in India fall under the 10% tax bracket, which means that the impact of the tax applicability on maturity proceeds in income based insurance policies is very limited. Even those who are getting a bit impacted i.e. whose aggregate annual premium is above Rs 5 lacs, they can invest before till 31st March 2023 and get full tax exemption on maturity proceeds.

It may be noted that tax exemption on maturity proceeds on income-based insurance products is available under the old tax regime as well as the new tax regime.

Looking at the current yield offered by guaranteed income products and the very limited implication of tax on maturity proceeds as explained above, it still remains a very attractive investment option for people to create a corpus or get guaranteed annual payout and plan their retirement.

Mukesh Vijayvergia, Founder of Nishkaera Financial Advisory and Wealth Management Private Limited

 

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First Published:3 Mar 2023, 12:53 PM IST
HomeMoneyPersonal FinanceDoes investing in guaranteed income products still make sense? MintGenie explains

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