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Budget 2012 & Tax Impact On Your Life / Health Insurance Policy

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Budget 2012, there are few changes introduced in the tax provisions of insurance premiums and returns. The main reason of introducing these changes is to make insurance buyers buy insurance policy for risk cover instead of tax saving or investment instrument by purchasing insurance cum investment plans. Along with change in tax provisions, budget 2012 has also increased the service tax on many services which includes insurance and banking services.

Lets have a look how changes in tax provisions of insurance sector will impact your pocket this year.

1. Life insurance policies (except pension plans) issued after April 1, 2012, have to offer risk  protection of at least 10 times the annual premium of the policy to be eligible for the tax benefit under section 80C and section 10(10D) of income tax act 1961. As of now, the mandated risk cover was 5 times the annual premium. So if you are planning to buy an insurance product make sure your life cover should not be less than 10% of the annual insurance premium else you will not be eligible for tax deduction against your life policy.

For Example, if you buy a life insurance policy with annual premium of Rs 20,000 for a Sum Assured of Rs 100,000 lakhs, then you will not qualify for tax exemptions because here sum assured is 5% of the annual premium.

  • Section 80C :- Offers tax deduction on life insurance premium upto Rs 1 lakhs
  • Section 10(10D) :- Offers tax exemption on maturity proceeds from insurance company.
  • This change will impact most of the unit linked insurance plans (ULIPs) and Endowment Plans available whereas most of the term plans will not be impacted with this change as they already fulfills this criteria.
  • This change will benefit insurance customers as this will make insurance companies to offer insurance plans which will ensure a minimum life cover to the insured.
  • This will make people go for pure life insurance products (Term Plans) rather than money –back plans to save tax or for investment.
  • With change will demand a major part of the premium to go for mortality charges due to mandatory high risk cover.
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2. Life insurance policies issued after April 1, 2012 will be eligible for tax exemption under section 80C and section 10 (10D) of the income tax act 1961 only if the yearly premium during the policy tenor was less than 10% of sum assured. As of now, this percentage is 20% So if you are planning to buy an insurance product make sure your insurance premium should not be more than 10% of the sum assured in any any year during policy period else you will not be eligible for tax deduction against your life policy.

So for example if you buy a life insurance policy with annual premium of Rs 20,000 for a Sum Assured of Rs 1,00,000, then you will not be eligible for tax exemptions because here premium is 20% of sum assured.

3. Bonus On Life Insurance Will Not Be part Of Sum Assured :- The new definition of sum assured excludes the bonus amount received for claiming tax deductions.

4. Deduction Under Section 80D :- Budget 2012 has introduced deduction upto Rs 5000 for preventive health checkup. Currently one can claim Rs 15000 as deduction against premium paid for self, spouse and dependent children for medical insurance. But now one can also claim deduction upto Rs 5000 for the amount paid for preventive checkups like blood test. But this is a part of Rs 15,000 limit not additional one.

5. The age of senior citizens for the purpose of tax benefit on insurance premium or returns has been reduced from 65 years to 60 years.

6. Increase In Service Tax :- This will make insurance policies 2% costlier as service tax is proposed to increased from 10% to 12%.

So after implementation of these changes in the insurance sector, customers would prefer to put there funds in other investment plans like public provident fund (PPF), tax free infrastructure bonds, and non-convertible debentures for wealth creation rather than investing under insurance policies. However existing policy holders don’t have to worry about this provisions  as their policies wont be affected.

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ALSO READ :- Highlights Of Indian Union Budget 2012

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