NEED TO KNOW PURE TERM POLICIES TAX-EXEMPT

The Central Board of Direct Taxes has clarified pure term insurance policies are still exempted from taxation irrespective of their premium amount

- Narayan Krishnamurthy

There is something about income tax savings and life insurance. The two have been synonymous for decades to the extent that scores of income taxpayers have for generations looked at life insurance as a tax-saving instrument. The government has in recent years worked towards addressing this anomaly by curtailing the tax-free status enjoyed by policyholders on the maturity of insurance policies. In 2021, high-value ULIPS were made taxable and earlier this year, the budget proposal indicated similar restrictions in tax-free status for non-ULIP life insurance products. However, the detail lacked clarity on how to view this aspect of taxation on insurance policies.

In August, the CBDT (Central Board of Direct Taxes) issued a 17-page guideline to explain how this change will come into effect and what kind of non-ULIP life insurance policies will be affected. Pure term insurance policies will be exempted from taxation irrespective of their premium amount. Also, premiums paid toward pure term policies will not be included in calculating the total premium amount for taxation purposes. This, however, excludes term plans that repay the premiums on maturity. Likewise, the CBDT also clarified that the GST component would not be included for the purpose of calculating premiums for taxation purposes.

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