The Central Board of Direct Taxes (CBDT) has rolled out new rules for calculating the tax-exempt portion of maturity amounts from life insurance policies in a financial year if you've paid more than a certain premium. These rules apply to life insurance policies purchased on or after April 1, 2023. So, here's the scoop on what's changing.
New Tax Rules
Before we dive into the nitty-gritty, let's break it down. If your yearly premium for a life insurance policy crosses Rs 5 lakh, the maturity amount won't be entirely tax-exempt. This rule came into play after the 2023 Budget announcement. However, it's important to know that these rules don't affect unit-linked insurance policies (ULIPs). ULIPs started getting taxed on February 1, 2022, if the annual premium crossed Rs 2.5 lakh.
The CBDT made these new guidelines official through a circular and notification on August 16, 2023.
What Does the CBDT Circular Say?
The new CBDT guidelines only apply to policies issued on or after April 1, 2023. If your policy was issued before this date, your maturity proceeds remain tax-exempt, no matter how much premium you've paid.
The CBDT circular states that your insurance policy's proceeds become taxable if they meet these criteria:
a) For a single insurance policy: If the premium paid in previous years during the policy term exceeds Rs 5 lakh, the money received will be taxable.
b) For multiple insurance policies: If you have several policies, the combined premium paid in previous years during the policy term exceeding Rs 5 lakh will make the money received taxable.
However, it's crucial to note that these tax rules don't apply if the policyholder passes away, regardless of the premium paid. The taxable amount, in such cases, will be categorized under 'Income from other sources.'
How Is the Tax-Exempt Portion Calculated?
Wadhwa explains, "The CBDT guidelines allow individuals to choose which insurance policies (with an aggregate premium exceeding Rs 5 lakh) they want to claim tax exemption for. So, you can select policies with higher maturity yields for tax exemption and pay taxes on those with lower maturity amounts."
The CBDT provides examples in its circular to illustrate how tax exemptions for life insurance proceeds are calculated when the premium paid in previous years exceeds Rs 5 lakh. From the examples, you can see that maturity proceeds from a policy issued before April 1, 2023, remain tax-exempt. However, for policies issued on April 1, 2023, you'll need to calculate the tax-exempt portion.
In some cases, maturity proceeds from certain policies might be tax-exempt, while others could be taxable, depending on the total annual premium during a financial year. It's essential to consider that the annual premium does not include GST.
Exceptions for Term Life Insurance
These new CBDT guidelines don't apply to term life insurance policies. This is because, in the case of the policyholder's demise, the payout goes to the nominee, and no amount is paid to the policyholder if they survive the policy term.
Income Tax Rates
The tax rate will depend on your overall income of the individual.
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