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How to Save Taxes If Aggregate Premium of Your Life Insurance Policy Exceeds Rs 5 Lakh in a Year?

Personal and direct taxes underwent several adjustments due to the Union Budget 2023. The insurance industry received some of the greatest attention. Insurance premiums of more than Rs 5 lakh will now be taxed. People used to get insurance to safeguard their families and file taxes, but this is no longer an option.

Before reading on, know that a life insurance calculator is an easy-to-use tool you may use online to determine the amount of coverage required based on your needs.

Removing the Tax Exemption Benefit for Insurance Premiums Beyond Rs 5 Lakh

An upper limit has been proposed for the life insurance tax benefits against income from conventional life insurance contracts in the 2023 Budget. The new proposal becomes applicable when the total annual premium for high-value insurance contracts reaches Rs 5 lakh.

If the premium for ULIPs is more than Rs 2.5 lakh per year, there would be a capital gain tax.

As a result, traditional life insurance policies (non-ULIP) proceeds would no longer be eligible for tax exemption if your total premium payment exceeds Rs 5 lakh. However, the exemption benefit is only deducted from the policy’s maturity proceeds; it is not deducted from the claim proceeds received upon the passing away of the insured.

Consider that you already have a life insurance policy, and your annualised premium total exceeds Rs 5 lakh. You shouldn’t worry, though, as the proposed changes will only apply to insurance policies issued on or after 1 April 2023.

To avoid paying tax on insurance proceeds in the future, you could have bought a life insurance policy with an annual premium total of more than Rs 5 lakh before March 31, 2023.

This method allows for adequate coverage. The tax-saving investment requirements can be satisfied by combining small savings, provident funds, and ELSS, where the returns and liquidity may be significantly higher than regular life insurance.

The Exemption Benefit for ULIPs with Aggregate Premiums of More Than Rs 2.5 Lac/Year Was Lost.

In the 2021 Budget, the exemption on ULIP earnings with aggregate premiums exceeding Rs 2.5 lakh per year was eliminated. As a result, both ULIP and conventional insurance contracts will now have restrictions on tax exemption.

You should not be concerned if your aggregate premium for purchasing insurance falls below the applicable ceiling specified in the budget to qualify for the exemption benefit.

The New Tax System Has Changed, Making Insurance Less Desirable as a Tax-Saving Tool.

The new tax system was made the default in the 2023 Budget announcement, and the tax slabs have also been changed. The rebate under Section 87A will be available under the new tax system for income up to Rs 7 lakh. It indicates that under the new tax system, you are exempt from paying taxes if your income is up to Rs 7 lakh. In contrast, the 87A refund under the previous tax system only applies to income up to Rs 5 lakh.

To claim the deduction benefit and reduce your taxable income below Rs 5 lakh to qualify for the rebate u/s 87A to save taxes, you must invest in instruments under section 80C, purchase health insurance under section 80D, invest in NPS under section 80CCD, and use similar options if your income under the previous regime was above Rs 5 lakh.

Tax deductions for traditional life insurance premiums are allowed up to Rs. 1.5 lakh per year (section 80C). However, this results in less discretionary income for taxpayers under the previous tax system. Now that traditional life insurance plans are not required to be purchased to reduce taxes, taxpayers with incomes up to Rs 7 lakh will gain more by moving to the new tax system.

Taxpayers with income up to Rs 7 lakh will have more money after paying taxes under the new system than the old one. It is now anticipated that those with incomes up to Rs 7 lakh will focus more on term plans for their life insurance needs rather than purchasing regular policies to avail of life insurance tax benefits.

Before hopping off, remember that a life insurance calculator is a simple tool to check the amount of premium you would have to pay.

By opting for the right policy, taking advantage of deductions, and making informed decisions, you can effectively manage your tax liability while ensuring your family’s financial security.

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