Insurance plans in high demand; non-Ulip plans going to be taxable from April 1

The insurance policies (excluding Unit Linked Insurance Plans or Ulip) with cumulative annual premiums exceeding Rs 5 lakh will become taxable from April 1, 2023, as per the budget proposals. This has led to a surge in demand for non-Ulip policies, particularly guaranteed plans.

"People are using this opportunity because this is the last month to deploy a part of their savings toward tax-saving vehicles, and this is for non-par and par policies with premiums more than Rs 5 lakh. So, we are seeing that trend," said Prashant Tripathy, Managing Director and CEO, Max Life Insurance Company.

Vivek Jain, Head of Investments Business, Policybazaar.com concurred: “At Policybazaar, we are especially seeing increased traction for guaranteed return plans. To avoid getting taxed under Section 10 (10D) after the deadline, it is recommended to purchase a guaranteed return plan now and lock in the tax-free maturity amount for the future.”

Apart from the tax advantage the guaranteed plans have become popular because of the ability to lock in a high interest rate for the next 20, 25, 30 years, especially when one expects interest rates to fall. The post tax return from such plans is 6-6.5 per cent per annum.

Jain explained: "For instance, if you invest rupees Rs 12 lakh annually for 5 years then in 10 years, your maturity amount will be Rs 1.03 crore. Today, this entire maturity amount will be absolutely tax exempted under Section 10(10D). While, if you invest the same amount after March 31, then this maturity amount will be taxable and you will only make Rs 86 lakh, assuming that you fall in the highest tax slab."

Guaranteed plans offer capital protection where policyholders can choose to receive the payout in the form of a lump sum or regular income for a certain number of years. The return from these policies is around 6-6.5 per cent, which gets fixed at the time of buying the policy and remains the same throughout the tenure of the policy. HDFC Life’s Sanchay Plus is among one of the popular plans in the market, which offers guaranteed payouts for different tenures.

The guaranteed plans have become popular as retirement plans given the fixed amount, they pay over the long term similar to annuity plans. Under these policies, you pay a premium for a fixed-term followed by a deferment period of 1-2 years after which you start receiving regular payouts. It comes with a term cover, which goes away when you start receiving payouts. It is important to note that while pension amount is taxable under annuity plans, guaranteed plans are currently treated as an insurance policy under the Income Tax Act (as it offers insurance cover) and hence the payout becomes tax-free.

A similar type of taxation was introduced in Budget 2021, where maturity proceeds of unit-linked insurance policies became taxable if premiums exceed Rs 2.5 lakh.

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