Proceeds from life insurance over the annual premium of ₹5 lakhs would now be taxable from April 01, 2023. Ever since Finance Minister Nirmala Sitharaman announced the change while presenting Union Budget 2023-24 in the Parliament, there has been a lot of unrest in the minds of the entities involved in the sector. For any policies purchased before the said date, however, the rule will not be applicable. Because of this sudden announcement, many people might question the benefits of insurance.
The primary expectation from the Union Budget each year is to introduce newer reforms in the system for the betterment of the country’s economy and its people. While by no means it is recommended for anyone to rush into any investments before doing their due diligence, it is important to understand how the new rule would impact a certain section of consumers who are looking to purchase an endowment policy.
We are here to tell you that the move is still not likely to dampen the spirits of insurers or insured as in today’s day and age, people have realised the importance of a financial cushion. While the announcement might reduce the interest to buy high-value, traditional insurances, industry experts have opined that it is also likely to increase the focus on term plans, pure risk covers, and investment-oriented unit link insurance, which is a notable swing.
However, it is important to understand that the benefits of insurance still remain unmatched. For instance, with HDFC Life Guaranteed Income Insurance Plan, the insured entity can avail a guaranteed long term income, a guaranteed lump sum amount on maturity which will help with various future milestones, and a full guaranteed death benefit even during income payout period to secure your loved ones future.
If experts are to be believed, insurance is still a safer option as compared to other forms of investments, as it offers protection for the family of the insured.
The new rule will impact high net worth individuals (HNI), and also ones who have extensive needs, and therefore need to purchase a high value policy. HNIs who buy high premium policies now can avail guaranteed tax free annuities of up to 6.9%, which is equivalent to an FD with an interest rate of approx. 9.7% for an individual whose annual income is in between 50 lac to 1 crores, approximately 10.2% for an individual whose annual income is in between 1-2 crores & approximately 11.1% for an individual whose income is above 5 crores. These rates are approximately corresponding to the percentage surcharge on tax the respective HNI is paying. This essentially means that the HNIs can take advantage of this brief window available till 31st march 2023 to lock in these guaranteed high interest rates for next 35-40 years depending on the chosen policy.
India is a fast-growing and emerging economy, and according to financial experts the interest rates on FD are bound to go down as we have witnessed in the past few decades. Just in 3 decades the interest rates on a bank FD have gone down from approximately 15% in 1991 to 6% in 2021 this opportunity could be a great trade off to lock in high guaranteed interest rate for next 3-4 decades for HNIs.
Notably, the new proposal will only affect non-ULIP savings segment like the most popular non-par savings among private insurers and par-savings; ULIPs, term protection and annuities will not be covered here and tax free benefits would continue on those.
Since the new rule is applicable from April 01, 2023, a lot of people are now rushing to get their life insurance policies before the said date. If you are assessing whether you should get a suitable insurance policy at this point, you must do your due diligence first. We advise that you visit the HDFC Life website and learn the benefits offered by different insurance plans before deciding where to invest your money and which plan is the best for you.
