This is because of proposed amendments in tax laws. The Direct Tax Code (DTC) comes into effect from 1st Apr. 2012, has laid down restrictive conditions on tax deductions to insurance premium and income from insurance policies.
Mr Niraj Jain, CEO of Bonsai Insurance, Broking firm that launched India’s first Online Portal www.insurancemall.in, said “Changes in direct tax code will offer very limited tax benefits on insurance; but hopefully it will reduce mis-selling of insurance which is done through agents”.
Important changes in Direct Tax Code (1st Apr 2012.)
1) Under DTC, an insurance policy that offers cover of less than 20 times the annual premium won’t be eligible for tax deductions.
It means if the premium of your insurance policy is Rs 10,000, it should offer a life cover of at least 2 lac to be eligible for tax deduction in coming years.
If the 20 time life cover condition is not met, even the income accruing from the policy will be taxable.
2) The tax deduction limit for the life insurance will be reduced from the present Rs 1 lac to Rs 50,000 a year.
This Rs 50,000 limit would also include the amount paid for tuition fees of children as well as medical insurance. Hence, there won’t be too much head room left for a big premium paid on an insurance policy.
3) DTC also made changes in the partial withdrawals on insurance plan.
Currently any income from the insurance is tax free, except surrender of pension plan or withdrawals of ULIP in lock in period.
But as per under DTC, if any insured wished to withdraw his money from ULIPs will attract capital gain tax. If any insured surrenders insurance policy then surrender value of a will also be taxable.
Now If you still want to purchase an insurance policy to save tax, make sure that your policy is providing you, life cover of 20 times of your annual premium. Buy a long term plan 20-25 years which will give you higher life risk cover.
Amendments in DTC might force insurance companies to provide adequate life cover on Unit Linked Plans at competitive rates and hopefully customer will get the benefits of these changes in the end.