Wednesday, November 9, 2011

Impact of Direct Tax Code on Insurance

It’s time for the annual tax saving rigmarole to start – calls to your chartered accountant or financial planner, poring over documents, discussions on best-suited investment options, and so on. Things may not be much different this year from before, except for one key difference. You could see your planners considering the proposals in the Direct Tax Code (DTC) while drawing up the list of tax-saving instruments for you. Since many individuals prefer to (or are goaded into) buying life insurance policies merely to save tax – a tendency, say financial planners, that is not advisable at all – here’s what you need to know about tax breaks pertaining to life and health insurance policies under DTC.
While DTC is yet to be formally legislated and, hence, is subject to change till it is implemented, it wouldn’t hurt to keep an eye on the proposals while planning for the current year. And the chief reason why you need to understand DTC’s provisions on insurance is because it will have retrospective effect, which means policies that you may buy this year keeping the current norms in mind (and even those bought in the past, if any) might see different tax treatment in future. Under the current laws, an individual can claim deduction on premium of up to  1 lakh per annum paid as pre
mium for life insurance. Life insurance is among the many tax-saving avenues under section 80 C of the Income-Tax Act. The section also offers tax breaks on investments in provident fund, pension fund, and ELSS (equity-linked saving schemes), besides home loan principal repayment and children’s tuition fees. If DTC is implemented in its existing form, the total savings-related deduction will be  1.5 lakh.
However, out of this, an aggregate deduction on life as well as health insurance premium and children tuition fees will be restricted to  50,000. What’s more, you will not be entitled to deduction on life insurance premium if it exceeds 5% of the policy’s sum assured. That is, if your policy offers a cover of  10 lakh, then your annual premium cannot be more than  50,000.
If your policy structure does not meet this condition in any of the years, you will also have to pay tax on the proceeds received upon completion of the tenure. This apart, the maturity proceeds will be exempt from tax only if they are received upon completion of the original period of contract of the insurance.
Another change is that both forms of insurance – life and health – are clubbed together for calculating deductions unlike now, where health insurance-related concessions for premiums up to  35,000 (or up to  40,000 in some cases) fall under section 80D. 

Courtesy : Economic Times