CBDT released new guidelines! Tax rules have changed on maturity amount of life insurance policies
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CBDT has said in the guidelines that if the premium of any one life insurance policy is more than Rs 5 lakh in the previous year, then tax will have to be paid on the maturity amount. If a person has more than one policy and the total premium paid over the years for different policies exceeds Rs 5 lakh per annum, the maturity amount of all the policies will be charged to tax.
The Central Board of Direct Taxes (CBDT) has issued new guidelines on tax rules relating to life insurance policies. These guidelines have been issued keeping in view the changes in tax rules relating to life insurance policies with effect from April 1, 2023. In fact, in the budget presented in February this year, the government had said that the maturity amount would be completely tax-free – free of charge if the premium of a life insurance policy exceeds a threshold.
It has been told in the new guidelines that if the premium amount exceeds the prescribed limit, then what part of the maturity amount will be tax-free. The method of its calculation has been explained in the guidelines. In fact, the budget presented this year said that if the premium for a life insurance policy exceeds Rs 5 lakh in a financial year, the maturity amount will not be tax-free.
The new rules will be applicable from 1 April 2023
Only policies issued on or after 1 April 2023 will come under the ambit of the new rule. Unit-linked insurance policies (ULIPs) will not come under the purview of this rule. The taxation of ULIPs maturity amount has been changed only last year. According to this, if the premium paid for ULIP exceeds Rs 2.5 lakh in a year, the maturity amount will be taxable. This rule has come into force from 1 February 2022.
Tax rules do not apply on the death of the policyholder
CBDT has said in the guidelines that if the premium of any one life insurance policy is more than Rs 5 lakh in the previous year, then tax will have to be paid on the maturity amount. If a person has more than one policy and the total premium paid over the years for different policies exceeds Rs 5 lakh per annum, the maturity amount of all the policies will be charged to tax. The maturity amount will be treated as income from other sources. It is important to note here that if the policyholder dies, the maturity amount will not come under the tax net, even if the premium amount exceeds Rs 5 lakh.
Understand new rules like this by example
CBDT has tried to explain the new rules with examples. Suppose a person has four life insurance policies named A, B, C and D. The annual premium for one is Rs 4.5 lakh. The annual premium of B is Rs.1 lakh. The annual premium of C is Rs.1.5 lakh. D’s annual premium is Rs.6 lakh. In this case, the maturity amount of A policy will not come under the tax net. The reason for this is that its annual premium is less than Rs 5 lakh. But, the maturity amount of B, C and D will be taxed as the total premium of all these three policies in a year exceeds Rs 5 lakh.
Taxes will be applicable as per the slab of the policyholder
The CBDT has also said that for tax purposes, the premium will not include the GST share. The maturity amount of LIC policy will be taxed as per the slab of the policyholders. This means that people in the higher income group will have to pay higher tax on the maturity amount. People coming in low income group will have to pay less tax.
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