Paying Over ₹5 Lakhs Premium? The New 'Tax Trap' on Life Insurance Maturity

Paying Over ₹5 Lakhs Premium?

For decades, traditional life insurance plans (Endowment, Money Back) were the favorite investment of wealthy Indians. Why? Because under Section 10(10D) of the Income Tax Act, the maturity amount was completely tax-free.

You could invest ₹10 Lakhs a year, get 6% returns, and pay ₹0 tax on the final payout. It was better than a Fixed Deposit (FD).

That party is over.

The Government of India has plugged this loophole via the Finance Act 2023. If you bought a policy on or after April 1, 2023, and your premium is high, you might be walking into a tax trap.

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The New Rule (Aggregate Premium Limit)

The rule is simple but strict:

• If the aggregate annual premium of your traditional life insurance policies (issued after April 1, 2023) exceeds ₹5 Lakhs, the maturity benefit loses its tax-exempt status.
• Crucial Tweak: When calculating the ₹5 Lakh limit, do NOT include the GST component. Only the base premium counts. (e.g., If you pay ₹5.2 Lakhs but ₹25k is GST, you are still SAFE).

💸 How Is It Taxed? (The "FD" Logic)

Many people think the entire maturity amount is taxed. That is incorrect.

Only the "Net Income" (Profit) is taxable.

• Formula: Maturity Amount - Total Premiums Paid = Taxable Income.
• Tax Rate: This profit is added to your total income under "Income from Other Sources" and taxed at your applicable slab rate (which could be 30% + surcharge).

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The "Aggregate" Catch

You cannot cheat the system by splitting policies across different insurers.

• Scenario: You buy one policy from LIC with a ₹3 Lakh premium and another from HDFC Life with a ₹3 Lakh premium.
• Total Premium: ₹6 Lakhs.
• Result: Since the total exceeds ₹5 Lakhs, the exemption applies only to the first ₹3 Lakhs (LIC). The second policy (HDFC) becomes fully taxable. You can choose which policy to claim exemption for to maximize your benefit.

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Exceptions (Who is Safe?)

The tax trap does NOT apply in these cases:

1. Death Benefit: The payout received by your nominee upon your death is ALWAYS tax-free, regardless of the premium amount.
2. ULIPs: Unit Linked Insurance Plans have a separate limit of ₹2.5 Lakhs. The ₹5 Lakh limit applies only to Non-ULIP traditional plans.
3. Old Policies: Policies issued before April 1, 2023, are grandfathered and remain 100% tax-free.

Investment vs. Insurance

Insurance is for protection, not investment. The government has made that message clear with this tax change.

If an agent tries to sell you a "Guaranteed Income Plan" with a huge premium, asking you to sign a check for ₹10 Lakhs, stop. Ask them: "What is the post-tax return?" Once you deduct the 30% tax on the profit, that 6% return might look more like 4%.

(Disclaimer: This article is for informational purposes only. Tax laws in India are subject to change by the CBDT. Please consult a Chartered Accountant (CA) for your specific tax filing.)