AT first look it appears that existing tax breaks will continue on life products under the revised Direct Tax Code. But a closer reading shows that this is not the case. In the earlier code, it was proposed to tax maturity benefits of life insurance policies. Revised code reverts to existing exemptions but specifies that these are available only for 'pure' insurance plans. Since no definition is provided for a 'pure' insurance plan there is confusion.
If implemented, the changes in the tax system will be prospective in nature and products that are bought after April 1, 2011, will be subject to the proposed tax system.
At present maturity proceeds of a life insurance policy are tax-free in the hands of the individual. Life insurance has been, therefore, popular as an investment vehicle because of this three stage tax exemption (tax breaks for investing, tax benefits on gains by the fund and tax free maturity benefits). Under DTC II, if it is a non-annuity investment product, the maturity proceeds will be added to the income of the individual and taxed at a marginal rate.
Investment products such as unit-linked insurance plans and endowment plans are expected to come under EET regime. Ulip is offered similar tax treatment that of a mutual fund as both of them offer similar solutions to investors. However, there is a need to have some clarity for better interpretation.
An industry expert is of the opinion that the government may specify a certain minimum ratio of premium paid to maturity benefit for a product to qualify as 'pure' insurance plan.
Annuity products are also allowed EEE tax treatment. This proposal, if it goes through, will encourage long-term savings aimed at better retired life for individuals. In the absence of social security benefits, even individuals employed in the unorganised sector need some support and the current proposal on annuity plans is a better solution. But the annuity received from an insurer in the hands of the annuitant is taxable.
