During a portfolio review, a client presented an investment-linked life insurance policy with an annual premium of ₹3,00,000, questioning whether the maturity proceeds would remain tax-exempt. As an advisor, you cannot simply look at the death benefit; you must analyze the premium threshold established by the Finance Act 2021. This legislative shift changed the landscape for life insurance planning by removing the tax-free status for maturity proceeds on policies where the aggregate annual premium exceeds a specific limit.
The Finance Act 2021 introduced an amendment to Section 10(10D) of the Income Tax Act. It stipulates that for life insurance policies (other than ULIPs) issued on or after April 1, 2021, the exemption on maturity proceeds is withdrawn if the aggregate annual premium exceeds ₹2,50,000. In such cases, the maturity amount is treated as income from other sources and is taxable at the applicable slab rates for the policyholder.
This is a critical distinction, as it effectively strips away the tax-efficient wrapper that previously made high-premium endowment or whole life plans attractive.
From a valuation and recommendation perspective, this amendment forces a shift toward the ’term plus mutual fund’ model. When modeling potential returns for a client, an analyst must now calculate the post-tax internal rate of return (IRR) for high-premium policies. If the policy is taxable at maturity, the effective yield often drops significantly below that of a standard systematic investment plan (SIP) in an equity mutual fund, which enjoys distinct capital gains tax treatment.
Ignoring this tax impact in a financial plan could lead to overstating the projected wealth accumulation for your clients.
Consider two clients: one with a policy premium of ₹2,00,000 and another with ₹3,00,000, both issued in 2022. The first client retains the full tax-exempt benefit of the maturity corpus, provided the policy meets the other standard regulatory criteria. The second client, however, will face a tax drag upon maturity, drastically altering the net present value of their investment. As professionals, we must ensure that clients understand this threshold, as it is a firm regulatory boundary that cannot be bypassed through policy structuring or splitting premiums across different insurers.
Nuance
Check Your Understanding
An individual purchases a traditional endowment policy on May 15, 2021, with an annual premium of ₹3,00,000. How will the maturity proceeds be treated for tax purposes upon completion of the policy term?
Which of the following is true regarding the impact of the Finance Act 2021 on life insurance policies issued on or after April 1, 2021?
This is a companion read for Section 2.3 — Types of Life Insurance Products from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.
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