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 years, then tax will have to be paid on the maturity amount. If a person has more than one policy and the total premium paid in the previous years for different policies exceeds Rs 5 lakh per annum, then the maturity amount of all the policies will be taxed.
The Central Board of Direct Taxes (CBDT) has issued new guidelines on tax rules related to life insurance policies. These guidelines have been issued keeping in mind the changes in tax rules related to life insurance policies from April 1, 2023. In fact, in the budget presented in February this year, the government had said that the maturity amount will not be completely tax-free if the premium of the life insurance policy exceeds a limit. In the new guidelines, it has been told that if the premium amount crosses 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, in the budget presented this year, it was said that if the premium of a life insurance policy exceeds Rs 5 lakh in a financial year, the maturity amount will not be tax-free.
The new rules will come into effect from April 1, 2023
Only policies issued on or after April 1, 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 tax treatment of ULIPS maturity amount has been changed only last year. According to this, if the premium paid for a ULIP exceeds Rs 2.5 lakh in a year, the maturity amount will be taxable. This rule has come into force from February 1, 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 years, 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, then the maturity amount of all the policies will be liable to tax. The maturity amount will be treated as income from other sources. It is important to keep one thing in mind here that if the policyholder dies, the maturity amount will not come under tax even if the premium amount is more than Rs 5 lakh.
Understand new rules like this by example
CBDT has tried to clarify the new rules with examples. Suppose a person has four life insurance policies namely 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. The annual premium of D is Rs.6 lakh. In this case, the maturity amount of A policy will not come under the ambit of tax. 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 these three policies is more than Rs 5 lakh in a year.
Tax will be applicable according to 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 have to be taxed as per the slab of the policyholders. This means that people in higher income brackets will have to pay higher tax on the maturity amount. People falling in the low income bracket will have to pay less tax.
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