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Are you buying the right tax-saving insurance product?
December, 11th 2015

With the tax-saving season coming, both insurers and mutual fund houses will aggressively promote their products to investors. Those who are buying insurance products, this year need to be more careful. So, it is important to check if the investment is tax-complaint, especially those above 45 years.

Explains Alok Agrawal, senior director at Deloitte Haskins & Sells: “The first condition pertains to the policies issued between April 1, 2003 and March 31, 2012. If the premium payable in any year exceeds 20 per cent of the ‘actual sum assured’, the policy proceeds are taxable in the hands of the insured. The actual sum assured means the cover which is least in all the policy years and does not include any bonus.

For policies that are issued after April 1, 2012, the actual sum assured needs to be at least 10 times the premium paid in any policy year to be exempt under Section 10 (10D) of the Income Tax Act. If the insurance product does not meet this criteria, then the whole proceeds from the policy will get taxed in the year of receipt. However, if the insured dies and the proceeds are paid to the nominees, there won’t be any tax on the amount. This holds true even for policies that don't comply with the above conditions. Even for 80C deductions, a person can only claim a benefit of up to 10 per cent or 20 per cent (depending on the investment years) of the sum assured. For a policy purchased this financial year, if the sum assured is, says Rs 2 lakh, and premium is Rs 30,000, tax laws allow you to claim only Rs 20,000 (10 per cent of Rs 2 lakh) as deduction

For easily tracking such policyholders, the government has made it mandatory for insurance companies to deduct two per cent tax before giving out the proceeds, for policies that do not comply with the Section 10 (10D) exemption norms. If the proceeds are less than Rs 1 lakh, the insurers will not deduct tax. “The insured, however, will need to pay relevant tax on it. Such proceeds that are not exempted from tax need to be declared in the head ‘income from other sources’ while filing returns,” says Agrawal.

Insurance players say single premium policies are worst affected by the move, where it is not possible to give sum assured that complies with the tax law. Some players have started offering an add-on cover with such policies. A person needs to buy the additional cover that takes the sum assured to 10 times the premium. But industry players are not sure if this makes the proceeds tax-free. Rituraj Bhattacharjee, head - product development, Bajaj Allianz Life Insurance Company, says the laws take into account the actual capital sum assured. “As per our interpretation, this does not comply with the tax laws.”

Bhattacharjee says the time when tax laws were amended last year, Insurance Regulatory Authority and Development Authority also came up with the new set of guidelines. Insurance companies have overhauled their products consequently. “Though the cover has increased, the expenses have gone down. Net result is that an insured can get better returns now compared to earlier products,” says Bhattacharjee. But a person above the age of 45 needs to be careful, while opting for a single premium product or traditional plan. Since the mortality charges go up with age, most policies offer a sum assured of about seven times the premiums. In this case, the insured will need to pay tax on the proceeds.

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