 "TDS tax")
Before April 2023 there was no limit on the amount of premium you could pay towards life insurance policies. This meant you could pay a large sum of money into your life insurance policy and get a tax deduction on the entire premium amount. This was a major tax benefit for policyholders. However, income received from insurance policies issued on or after 1 April 2023 (other than unit-linked policies), having a premium or aggregate of premium exceeding Rs 5 lakh in a year, will be taxable (except in the case of the death of the insured).
This means that any amount you pay above Rs. 5 lakh in premiums won't be eligible for a tax deduction. ULIPs have a separate rule with a lower cap of Rs 1.5 lakh for tax deductions under Section 80C. However, unlike traditional life insurance plans, the maturity benefit from ULIPs is taxable.
"Under the current system, the total premium you pay across all your life insurance policies (excluding Unit Linked Insurance Plans or ULIPs) in a year can only be up to Rs 5 lakh to qualify for a tax deduction under Section 80C of the Income Tax Act. Any amount above that won't be tax-deductible," said -Ritika Nayyar, Partner, Singhania & Co.
However there could be loopholes where tax payers may find out ways to mitigate or defer some taxes on the same by some planning:
Loophole 1: Spreading Out Maturity Payouts (Tax Deferral)
This strategy involves receiving the maturity amount (money you get at the end of the policy) in installments over several years, instead of getting it all at once.
The Benefit: Since only the amount exceeding the total premium paid is taxable, spreading out the payout allows you to receive the initial installments (up to the total premium amount) tax-free.
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Example: You pay a premium of Rs 25 lakh per year for 10 years (total premium = Rs 2.5 crore). The maturity amount is, say, Rs 31 lakh every year for 20 years, starting from the 11th year.
In this case, the first 8 installments (Rs 31 lakh x 8 years = Rs 2.48 crore) wouldn't be taxed because they don't exceed the total premium paid (Rs 2.5 crore).
You'd only pay tax on the remaining installments received after the 17th year.
Basically, you're delaying the tax payment, not eliminating it.
"In case a person pays Rs 6 lakh premium per year for a policy of 15 years and considers to choose the structure of the policy payout as regular payouts instead of lumpsum payouts in the end and he starts receiving pay outs from year 10 onwards. Say he received Rs 4.5 lakh as payout from year 10. Since the amount is taxable if the amount of total premium paid is less than the payout, till the time that breakeven is not crossed, the amount of such payouts may not be taxable. Once the cumulative amount crosses the total premium paid till that year, it will be taxable. So one may consider it as a tax deferring mechanism though not a full tax saving mechanism," said Nayyar.
Loophole 2: Taking multiple life insurance policies (Premium Splitting)
This involves buying multiple life insurance policies in a single year, with the total premium not exceeding Rs 5 lakh. This limit is per policy, not per person.
Two Scenarios:
Maturing in Different Years: If each policy matures in a different year, as long as the individual premium for each policy stays below Rs 5 lakh, none of the payouts will be taxed.
Maturing in the Same Year: If all policies mature in the same year, you can choose the one with the lowest payout to claim tax exemption under the Rs 5 lakh limit. Essentially, you get to pick the policy with the least tax impact.
"For example you buy 3 policies of premium Rs 2 lakhs each ( 6 lakhs premium per annum). If the policies mature in different years then no tax as for the policy matured in a particular year has not exceeded a premium of Rs 5 lakhs per annum. For all the said policies maturing in the same year then you are allowed to choose the one with lowest tax liability," said Alay Razvi, Partner, Accord Juris LLP.
"The policies may have different premiums which exceed the aggregate premium limit of Rs 5 lakh. Say for instance, one has three policies, for which premium are Rs 3 lakh, 2 lakh and Rs 1 lakh and they are all taken with different maturity periods. In such a scenario, one gets an option to choose to offer to tax the one with minimum tax liability provided the others are within the Rs 5 lakh limit too," said Nayyar.
However, its important to note that all such alternatives could be subject to litigation, and one must evaluate their financial and risk appetite while resorting to the same, so must be done with adequate advice from tax consultants.
