It’s been a 12 months for the reason that tax benefit for high-premium conventional life insurance insurance policies ceased to exist, main to a decline in their enchantment amongst excessive net-worth people (HNIs). However, the insurance trade has discovered a workaround. They’re selling the seemingly innocuous loan characteristic in these insurance policies as a means to sidestep tax obligations on maturity proceeds.
For the uninitiated, conventional life insurance insurance policies issued on or after 1 April 2023, with an annual premium exceeding ₹5 lakh, incur tax on their maturity or survival advantages. Death advantages, nonetheless, stay untaxed. Essentially, if you happen to’re paying ₹6 lakh yearly for such a plan, the maturity payout is topic to taxation at your revenue tax slab price. The whole premiums paid are deducted from the maturity quantity earlier than figuring out the tax legal responsibility at your slab price.
Earlier in style amongst HNIs, these plans are struggling to entice consumers. But trade specialists say that insurers have discovered a loophole to market them anew, suggesting purchasers leverage the loan provision towards the coverage’s money worth. Here’s the place the technique lies: purchasers can borrow 90-95% of the survival profit, tax-free. Loan can’t be taxed. The the rest stays with the insurer.
“This is how they are pitching it to customers. They say that the interest income on this amount will get set off against the interest rate on loan and policyholders do not have to pay interest on the loan amount,” mentioned an insurance govt on the situation of anonymity.
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This gross sales tactic primarily targets whole-life insurance plans, the place dying advantages lengthen for the policyholder’s lifetime up to 100 years. “In case of a death of the policyholder, the 90-95% benefit that has been withdrawn as a loan will be deducted from the death benefit and be given to the beneficiary,” the chief mentioned.
However, CA Sambhav Daga cautions that interpretations of Section 10(10D) of the Income Tax Act concerning “any sum received under a life insurance policy” might range.
“If the word received is taken in its literal sense, no tax issue will arise if you take the loan against the survival benefit. However, if the word received is to be taken in the context of accrued benefits, you may have to pay tax on it,” mentioned Daga.
Additionally, the rate of interest on loans towards insurance insurance policies is ready at Reserve Bank of India financial institution price + 1%, compounded yearly. The price is similar for the curiosity earned by the insurance firm, however it doesn’t compound.
“Due to the compounding of interest payable on loan and non-compounding of interest on money accrued with the insurance company, the policyholder will definitely lose some money,” Daga identified.
Moreover, insurers retain the authority to alter excellent loan quantities and accrued curiosity towards dying advantages or give up values, a element explicitly outlined in coverage paperwork.
Mint take
Taking loan as an alternative of maturity appears to be a good loophole to circumvent the tax legal responsibility beneath Section 10(10D) of Income Tax Act. However, prospects would do properly to seek the advice of their tax advisors earlier than appearing on the gross sales pitch by distributors. Life insurance insurance policies entail long-term commitments, and the efficacy of this tax loophole might evolve earlier than policyholders can capitalize on it.
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