📚 PASS Investment Adviser (Level 2) Difficulty: Intermediate ℹ️ Info   ~5 min read
📌 Chapter 2.7 — Criteria to evaluate various life insurance products

Imagine you are conducting a financial health check for a high-net-worth client who has been aggressively funnelling surplus capital into traditional endowment policies. While reviewing their portfolio, you notice an annual premium commitment of Rs. 6,00,000 for a policy issued in mid-2023.

As a financial advisor, you must immediately determine whether the maturity proceeds will remain tax-exempt under Section 10(10D) of the Income Tax Act, or if they will now be categorized as ‘Income from Other Sources.’ Miscalculating this liability can lead to a significant shortfall in the client’s projected net-of-tax cash flows.

The core of this issue lies in the 2023 amendment which sought to curb the use of high-premium insurance products as tax-efficient investment vehicles. Previously, maturity proceeds from almost all life insurance policies were tax-free regardless of the premium amount, provided the sum assured was at least ten times the annual premium. Under current regulations, if the aggregate annual premium for policies (excluding unit-linked insurance plans) issued on or after April 1, 2023, exceeds Rs.

5,00,000, the exemption under Section 10(10D) is withdrawn. This forces a shift in how advisors model long-term returns, as the tax drag can significantly reduce the internal rate of return (IRR) of such instruments compared to mutual funds or debt instruments.

To see this in practice, consider a client holding a policy with a Rs. 6,00,000 annual premium. Because this exceeds the Rs. 5,00,000 threshold, the maturity benefit becomes fully taxable at the individual’s marginal tax slab. In your valuation model, you cannot simply project the gross maturity value; you must calculate the surplus over the premiums paid and apply the applicable tax rate.

This adjustment often makes hybrid insurance products mathematically inferior to a ‘buy term, invest the rest’ strategy, where the investment portion remains subject to capital gains tax rather than income tax.

Ultimately, this shift represents a regulatory push toward the original purpose of insurance: risk protection rather than tax arbitrage. As an analyst, your duty is to highlight the ’effective yield’ of these products. When insurance is used for wealth creation, it must now compete on a level playing field with other investment vehicles. Always perform a sensitivity analysis on the tax status of the maturity proceeds before recommending any life insurance policy that involves a substantial annual premium.

Nuance

⚠️ Nuance
A common professional misconception is that the Rs. 5,00,000 threshold applies to individual policies rather than the aggregate of all non-ULIP policies held by the taxpayer. Candidates often fail to realize that even if no single policy exceeds the limit, the total premium across multiple policies issued after April 1, 2023, is what triggers the taxation. An astute advisor must track the total annual premium across the client’s entire post-2023 portfolio to avoid unexpected tax hits at the time of maturity.

Check Your Understanding

Practice Question 1

Mr. Sharma holds two life insurance policies issued on May 10, 2023, each with an annual premium of Rs. 3,00,000. Assuming these are non-ULIP policies, how are the maturity proceeds treated under current tax law?

Practice Question 2

Which of the following scenarios allows a life insurance policyholder to claim tax exemption on maturity proceeds for policies issued after April 1, 2023?

This is a companion read for Section 2.7 — Criteria to evaluate various life insurance products from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.