The main attraction of any insurance product is tax benefits at entry and exit. This is possible as long as there is minimum insurance component. Does your insurance policy comply with the rules?

The main attraction of any insurance product is tax benefits at entry under Section 80 C and at exit under Section 10 (10) D. Investors plunge in with their hard earned money just to reduce their tax burden and with an intention to build tax-free corpus at the end of the policy. But you need to be aware of the rules before you go by what your agent or advisor or a friend tells you as tax-free.

Insurance products give you deduction of up to Rs1,00,000 from taxable income under 80 C, subject to the life cover being at least five times the premium. If it is less than the minimum, the amount that can be claimed under Section 80 C for tax savings reduces appropriately. For example, if you take a single premium insurance policy with life cover of 1.25 times, then the amount claimed under 80 C will be only Rs25,000 for Rs100,000 premium paid.

The tax benefit for life insurance plans also extends to the time of maturity and in case of death claim under Section 10 (10) D. However, the maturity benefit is tax-free only if the premium paid per year is lesser or equal to 20% of the life insurance cover. In other words, the life cover has to be at least five times the premium. The maximum sum assured (SA) for most single premium insurance products is only five times the single premium. You will have to ensure that the SA is five times the premium before you buy the product for tax benefits.

Bajaj Allianz Guaranteed Maturity Insurance Plan has just launched a single premium ULIP (unit linked insurance product). It is walking the fine line of interpretation of grey areas of tax benefit. The product has SA of five times the single premium for the first  policy year and for subsequent years it will reduce to 1.25 times of the single premium for age-at-entry less than 45 years and 1.10 times of the single premium for age-at-entry 45 years and above.

The policy term is 10 years. In short, the SA of five times the single premium in the first year will reduce for the remaining nine years to be only 1.10 to 1.25 times the single premium. The question is whether customers can get tax benefits with this product?

A lot will depend on the subject of interpretation by tax consultants and more importantly Income Tax (I-T) authorities as there can be arguments on both sides. The product is single premium and in the first year when premium is paid, it is 20% of the SA. As there is no premium paid after the first year, does it have to comply with the SA being five times the premium for all the remaining years?

The argument on the other side will be that the product offers SA of five times the premium in first year and for the remaining nine years it offers SA of only 1.10 to 1.25 times the premium. It technically cannot get benefit of section 10 (10) D at the end of policy term even though it may possibly qualify for Section 80 C benefit at entry. The reason for laying down the minimum insurance component to be five times the premium is that the product should be an insurance product. If the insurance component is negligible, then it is as good as a fixed deposit (FD), which is taxable!

We spoke with few tax consultants. The consensus among them was that there is a very fine line of interpretation the insurance company is taking. According to them, “80 C tax deduction at entry may go through, but 10 (10) D tax exemption of the corpus at policy end may have an issue.” A different view was taken by an insurance industry official. According to him, “The product is filed by the insurer and approved by IRDA (Insurance Regulatory and Development Authority) considering the tax benefits under 80 C and 10 (10) D.”

This is a clear case of exploiting the loophole. If at the end of policy term (10 years), the customer finds that the corpus is taxable, will the insurance company stand by them? The insurance company states ‘Tax benefits under Sections 80 C and 10 (10) D, subject to the provision stated therein’. When Moneylife contacted Bajaj Allianz, a clear stand taken by them is that the individual has to consult his own tax consultant to avail the tax benefits.  

To be on a safer side, it is better to not invest in a product which will require you fight with some regulatory authority like the I-T department to argue your case. Better be safe side than be sorry! If you don’t fall in the tax bracket and will not fall after end of 10 years, then there is no issue at all.

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