The DTC is a game changer for insurance. Most Indians buy life insurance policies only to save tax. Under DTC, a policy should give a life cover of at least 20 times the annual premium to be eligible for tax deduction. If this condition is not met, you will not get any tax deduction on the premium and even the income from the policy will be taxable. Right now, the income received from insurance policies is tax-free.
The tax deduction limit for life insurance itself will get reduced from the present Rs 1 lakh a year to only Rs 50,000 a year. Besides, this annual limit of Rs 50,000 would include the amount paid for tuition fees of children as well as medical insurance for self and parents. So, an insurance policy with a very large premium of say, Rs 80,000-Rs 1 lakh will fetch a maximum tax deduction of Rs 50,000.
If you are looking for tax deduction on your insurance plan, make sure you buy a policy that offers a big cover. This is possible only if the term of the plan is at least 20-25 years. In Ulips, that might mean a higher amount being deducted as mortality charge for providing the life cover, but this is necessary if you want tax deduction.
Besides, the bigger the cover, the better it is for the policyholder. After all, the primary objective of an insurance plan is to cover the risk of death, not deploy the funds in the capital markets.
The DTC will also nudge policyholders to take a long-term view of their investments. Premature withdrawals from Ulips will be taxed, so think twice before you buy an insurance policy. Don’t believe the agent when he tells you that surrender charges have been capped and you can withdraw after five years without paying a penny.
Though the revised draft had indicated that the tax exemption enjoyed by existing policies will continue till the term of the plan, this is a grey area and clarity will come when the DTC is passed.