Insurance companies have asked the government to shift to the new tax regime under the Direct Tax Code only for those policies sold after the proposed Code came into effect from April 2011. The draft code, circulated for public comments, had suggested that life insurance policies should be taxed at the time of maturity. So, the contribution and accumulation would be exempt from tax payments, but the government would levy tax on the withdrawal amount. The exempt-exempt-tax (EET) method of taxation is proposed to be introduced from April 2011 and would also cover policies purchased before the cut-off date.
On its part, the Life Insurance Council, the industry lobby, has suggested that only policies sold from April 2011 should be subjected to the new system of levy. The companies argued that it would be unfair on individuals who had purchased a cover after factoring in possible returns. Through the Direct Tax Code, the terms were proposed to be changed mid-way through the policy term.
A person who started saving early did not know that the maturity amount would be taxed.