Are deferred annuity plans offered by life insurance companies taxable or tax-free?

I purchased a deferred tax-free annuity life insurance policy from TATA AIA Life Insurance Company, for which I have already paid two annual premiums of Rs 3 lakh each. I plan to buy another policy with an annual premium of Rs 3 lakh for my second child. Please tell me if the annuity amount I receive in future will be taxable or tax-free. I have heard that this rule has changed since April 1, 2023.   

- Abraham 

Reply by: Rajiv Bajaj, Chairman & MD, BajajCapital Ltd. 

You are absolutely correct. Effective April 1, 2023, there have been amendments concerning the taxation of life insurance policies. According to the new regulations, any life insurance policies with an annual premium amount higher than Rs 5 lakh, whether it is a single policy or the sum total of multiple policies, will be subject to taxation on the returns received at the time of maturity or when receiving monthly annuities. 

However, I would like to assure you that your specific situation will not be affected by these amendments. As you mentioned, you plan to purchase a policy where the annual premium will only be Rs 3 lakh. Since this amount falls below the threshold specified in the new regulations, you can rest assured that your policy will not be subject to taxation on the returns at the time of maturity or when receiving monthly annuity payments. 

Both your existing policy and the new policy you plan to acquire will continue to provide you with tax-free income as stipulated in the policies. This means you can maintain your financial plans without the additional burden of taxation on your life insurance returns. I hope this explanation clarifies the situation for you. It is always important to stay informed about any regulatory changes, especially those related to financial matters. 

Besides, people should know that a deferred annuity plan is a pension plan where you get the regular income or annuity after a certain period. Hence, if you are working, you have a few years left for your retirement and do not need a retirement income immediately, then you can opt for such plans. 

However, if you are already retired, you can opt for an immediate annuity plan if you have a retirement corpus in your bank account. This will help you get a monthly income after a year from the start of your policy, depending on the frequency chosen. The payouts from the plan differ from insurer to insurer and policy to policy. 

(Views expressed by the investment/tax expert are his/her own)