Worried about the Union Budget’s impact on term plans? Term insurance plans are essential because they provide financial security to families in case of the demise of breadwinners and policyholders. They help families cope with the loss while keeping their lifestyles and future financial goals on track. Additionally, a term insurance plan is an economical way of securing the family’s financial future, as it provides a higher sum assured for a lower premium amount compared to other plans.
India implemented a new tax regime previously that has significant implications for the insurance industry. All recent tax regimes have led to an alteration in taxation structures for insurance products, which has, in turn, impacted the insurance choices available to customers. In this article, we will discuss the impact of India’s new tax regime on insurance choices in 2023.
What is India's "New Tax Regime"?
India’s new tax regime introduced a simplified tax structure for individual taxpayers. The new tax regime has two tax slabs: 1) a lower tax slab with a reduced tax rate and 2) a higher tax slab with a higher taxation rate. This system also offers taxpayers the opportunity to select between the new or the past tax structures. The 2023 Union Budget saw the rebate limit being increased to Rs. 7 lakh from Rs. 5 lakh in the new tax regime. The new tax regime also got one deduction, namely a standard deduction of Rs. 50,000, as announced by the Union Finance Minister.
Here are the tax slabs in the new tax regime:
Income tax slab | Income tax rate |
INR 3,00,000 | Nil |
INR 3,00,000 to INR 6,00,000 | 5% |
INR 6,00,000 to INR 9,00,000 | 10% |
INR 9,00,000 to INR 12,00,000 | 15% |
INR 12,00,000 to INR 15,00,000 | 20% |
Income above 15,00,000 | 30% |
Impact of New Tax Regime on Insurance Choices
This regime has impacted the insurance choices available to customers in several ways. Here are some of the critical factors:
- Absence of Tax Benefits in the New Tax Regime
Traditional insurance products, including term insurance, endowment plans, ULIPs, money-back plans, and whole-life policies, no longer qualify for full tax benefits under the new tax system. Clients could earlier deduct the premiums they paid for these insurance products up to INR 1.5 lakh under Section 80C of the Income Tax Act. Conventional insurance plans are now less appealing to clients due to the decline in tax advantages in the new tax regime, which comes without the same.
- Term Insurance Benefits Stay Intact in Old Regime
More people will be geared toward choosing term insurance plans in the old regime since their taxation structure has not been tampered with. Hence, people can still get deductions up to Rs. 1.5 lakh on their term insurance premium payments under Section 80C without any changes. This will hold good since term insurance will secure the family’s financial future, which is essential in today’s times.
- Increase in Demand for Unit-Linked Insurance Plans (ULIPs)
ULIPs are seeing an increase in demand owing to their ability to help people save taxes under Section 80C while also enabling life coverage and investments for future returns. In addition, people see ULIPs as pivotal instruments for maximizing their Section 80C deductions while earning inflation-beating returns. Hence, remaining in the old tax system is proving to be beneficial for them.
What's It Looking Like For Term Insurance Plans?
Simply put, the new tax regime has not had any basic impact on term insurance plans. People are still taking the route toward family security by purchasing these plans. Now even if they opt for the new tax regime to save on taxes in the short-term or for any other reason, term insurance policies continue to be pivotal parts of every portfolio today, particularly after the global COVID-19 outbreak. People want to ensure financial coverage for a wide range of scenarios, and this aspect will always keep them at the forefront in terms of their popularity.
It’s vital to remember that the tax advantages depend on the premium amount being within the permitted range. The tax advantages are limited to 10% of the sum assured if the premium amount exceeds 10% of that amount. We suggest you use a term insurance plan calculator whenever you are trying to get hold of the right insurance policy. These are tools (calculators) that may be conveniently accessed online and assist in calculating the premium payment required for the selected life insurance coverage amount. You should avoid skimping on coverage to save money on your premium amounts. You should ensure that the future financial needs of your family are met even with increasing costs. Hence, going for the cheapest premium amount is not always the best solution in this regard. Go for the best possible coverage at the most reasonable premium.
