Insurance claims may be taxable under new code

Insurance claims may be taxable under new code



The insurance claims paid to policy holders in the event of death or disability will be subject to payment of income tax if the new Direct Taxes Code proposals are implemented. The Code proposes that contributions by the insured are subject to the EET method of taxation of savings. This means that the sum received under a life insurance policy, including any bonus, is taxed. Only a pure life insurance policy is exempted from tax. In a pure life insurance policy, the policy holder receives money only when death occurs. Life insurance companies are perturbed that the tax proposal could hit their business. Life insurers are taking up the issue with the government through the Life Insurance Council. According to an insurance company official, the council is sending its suggestions to the government and the regulator. “Even if you are in the lower tax bracket, when you get the sum assured, it will be a lumpsum amount. This would catapult you to a higher tax bracket and you will pay higher taxes,” said Mr Kamalji Sahay, CEO, Star Union Dai-ichi Life Insurance. Only term insurance policies would be exempted. Both ULIPs and traditional products would be taxed. The return would be taxed even in case of disability or death, said Mr Mr V. Srinivasan, Chief Financial Officer, Bharti AXA Life Insurance. The Direct Taxes Code has a section which says that maturity proceeds of an insurance policy shall be exempt only if the premium does not exceed 5 per cent of the capital sum assured. This means that for a premium of Rs 10,000, the sum assured will be exempted only if it is greater than Rs 2 lakh. However, most of the products sold by companies do not match this criteria, Mr Srinivasan said. There is also ambiguity on whether only the returns will be taxed and not the principal. It is not clear whether the tax would be applied on the basis of the real value of money invested or on the nominal value, Mr S.B. Mathur, Secretary-General, Life Insurance Council, said. For example, a person buying a traditional endowment plan could get a sum assured of Rs 5 lakh by paying a premium of Rs 4 lakh. It is not clear whether the policy holder would be taxed on the difference (Rs 1 lakh) or on the total sum assured of Rs 5 lakh that he receives at the end of the policy tenure. – www.thehindubusinessline.com


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