Tax Free Insurance Policy: Getting tax free income from insurance policies, except Ulips, restricted further

After ULIP taxation in 2021, the budget 2023 has put restrictions on tax free proceeds from other types of life insurance policies as well. All life insurance policies other than ULIPs were so far allowed to get tax free proceeds without any limit. So if the total annual premium paid on life insurance policies other than ULIP goes beyond Rs 5 lakh the proceeds will no longer be exempted from income tax. The only exception when the entire income will still be tax exempted is the sum insured received in case of the death of the policyholder.

“It is proposed to tax income from insurance policies (other than ULIP for which provisions already exists) having premium or aggregate of premium above Rs.5,00,000 in a year. Income is proposed to be exempt if received on the death of the insured person. This income shall be taxable under the head “income from other sources”. Deduction shall be allowed for premium paid, if such premium has not been claimed as deduction earlier. The proposed provision shall apply for policies issued on or after 1st April, 2023. There will not be any change in taxation for polices issued before this date,” says the explanatory memorandum to Budget 2023.

These amendments will take effect from 1st April, 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years.

Earlier, in order to prevent the misuse of exemptions on proceeds of life insurance policies there was amendment in clause (10D) of section 10 of Finance Act, 2021, to inter-alia, provide that the sum received under a ULIP (barring the sum received on death of a person), issued on or after the 01.02.2021 shall not be exempt if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs.2,50,000. It was also provided that if premium is payable for more than one ULIPs, issued on or after the 01.02.2021, the exemption under the said clause shall be available only with respect to such policies where the aggregate premium does not exceed Rs 2,50,000 for any of the previous years during the term of any of the policy. Circular no 02 of 2022 dated 19.01.2022 was issued to explain how the exemption is to be calculated when there are more than one policies.
After the enactment of the above amendment, while ULIPs having premium payable exceeding Rs 2,50,000/- have been excluded from the purview of clause (10D) of section 10 of the Act, all other kinds of life insurance policies are still eligible for exemption irrespective of the amount of premium payable.The new limit on products other than ULIP has been proposed in budget to curb such misuse,