The Change:
Only income from pure life insurance policies will be exempt from tax
For the income to be tax-free, the cover should be 20 times the annual premium.
Very few people in India buy life insurance for covering risk. Most look at it as a tax-saving tool and a way to accumulate wealth. This is why Ulips, which are essentially investment products with a nominal cover, are the hottest selling insurance plans. The DTC will make income from life insurance policies tax-free only if they offer a risk cover, which is at least 20 times the annual premium.
The Impact:
This might push people into buying life insurance for its real purpose-cover risk of death with a big sum.
The exempt-exempt-exempt (EEE) tax model makes the insurance policies attractive as an investment. After DTC changes the rules, insurance companies may have to alter the structure of their policies to make the products EEE-compliant. Here is what it means for different types of insurance plans.
Ulips: These may offer a small insurance cover, but their mortality charges are low. It is a fraction of the premium. Raising the minimum cover means the insurance company will deduct a higher mortality charge from the premium.
Traditional plans: Endowment policies and moneyback plans will have to be taken for very long terms if the income is to be exempt. Short-term plans of 8-10 years will not be EEE-compliant.
Term plans: These are pure insurance plans and already comply with the DTC requirement of a high risk cover. Term insurance plans don’t have a maturity value.
Existing policies will not be affected: There is no reason to worry if your existing policy does not meet the DTC requirements. The government has clarified that investments made till 31 March 2011 will be governed by the current tax regime till their full duration. This comes as a relief for millions of policyholders, who were fearing that the proceeds from their policies would be taxed on maturity. We consider the impact of the likely changes on your earnings and investments after the Direct Taxes Code (DTC) comes into effect from 1 April 2011 Only income from pure life insurance policies will be exempt from tax.
