Tax Reforms and Insurance: How the New Income Tax Bill Affects Policyholders

The Indian tax landscape is evolving, with the new Income Tax Bill aiming to simplify compliance,increase tax certainty, and minimize litigation. While these reforms promise a streamlined tax regime, they also bring significant changes to the way insurance premiums and payouts are taxed. For policyholders, this shift could alter financial planning strategies, influencing both the affordability and attractiveness of insurance products. Additionally, the impact of mis-selling of insurance policies, claim rejection services, lapsed insurance policies, and other insurance claim-related issues must be considered while making financial decisions.

A. Key Tax Reforms Impacting Insurance Policyholders
 
1. Changes in Tax Deductions on Insurance Premiums

• Previously, Section 80C allowed tax deductions on life insurance premiums.
• The new tax bill proposes fewer deductions, possibly removing or reducing these benefits.
• Impact: Life insurance may become less attractive, solely as a tax-saving tool.

2. Modifications to Section 80D – Health Insurance Benefits

• Currently, under Section 80D, policyholders can claim deductions up to ₹25,000 for health insurance premiums (₹50,000 for senior citizens).
• If the new tax bill eliminates these deductions in the simplified structure, policyholders might rethink their health insurance investments.
• Impact on Policyholders: Higher out-of-pocket expenses if tax incentives are removed. However, proper evaluation of health insurance plans can help avoid lapsed insurance policies due to affordability concerns.

3. Taxation of Insurance Payouts & Maturity Benefits

• Traditionally, proceeds from life insurance policies (sum assured and bonuses) were tax-free under Section 10(10D), provided the premium paid did not exceed 10% of the sum assured.
• The new tax bill might introduce a uniform tax treatment for maturity payouts, potentially taxing high-value insurance returns.
• Impact on Policyholders: Those relying on life insurance as an investment tool might see reduced tax-free returns, making them reconsider traditional policies. Additionally, understanding claim rejection services is crucial to ensure that claims are not denied due to technicalities or incorrect policy selections.

4. Annuity & Pension Products – Taxation Reforms

• Annuities and pension plans, often used for retirement planning, are currently taxable when received as income.
• The new bill may restructure tax treatment on annuity income, possibly offering incentives to promote retirement savings.
• Impact on Policyholders: If annuity taxation is relaxed, more individuals may be encouraged to invest in pension-linked insurance plans for long-term security. However, ensuring that policies do not lapse due to non-payment or inadequate understanding of terms remains crucial. Bima Seva Kendra can help with reinstating lapsed insurance policy.

5. GST Revisions on Insurance Premiums

• The 18% GST on insurance premiums has long been a concern for policyholders, particularly for term and health insurance.
• The budget discussions suggest a potential GST reduction for essential insurance products to increase affordability.
• Impact on Policyholders: Lower GST rates could make policies more accessible, encouraging higher insurance penetration. However, customers must remain cautious about mis-selling of insurance policies under the pretext of tax benefits or discounts.

B. The Bigger Picture: What Policyholders Should Do

With these tax reforms shaping the insurance landscape, policyholders must take proactive steps to optimize their financial planning:

• Evaluate Tax Regimes: Assess whether to stay in the old tax regime (with deductions) or switch to the simplified structure.
• Review Insurance Portfolios: Consider policy benefits beyond tax savings and focus on coverage, returns, and risk protection. This is especially important to avoid issues such as lapsed insurance policies.
• Understand Claim Rejection Services: Ensure that policies are selected carefully to minimize the chances of claim rejections.
• Consult Bima Seva Kendra: Professional guidance can help structure insurance investments appropriately while reducing risks related to insurance claim-related issues.

Final Thoughts: Smart Planning for a Changing Landscape
The new Income Tax Bill is designed to simplify taxation, but its impact on insurance-related tax benefits requires careful consideration. While some deductions may be reduced, reforms such as potential GST cuts and retirement incentives could balance the scales. However, policyholders must remain vigilant about mis-selling of insurance policies and ensure they invest in plans that align with their actual financial needs.

Connecting with Bima Seva Kendra not only helps in making informed decisions but also reduces the possibility of facing insurance claim-related issues. Expert advice can assist in addressing concerns like mis-selling of insurance policies, dealing with claim rejection services, and preventing lapsed insurance policies. Staying informed and proactive ensures that individuals continue leveraging insurance as a powerful tool for financial security—beyond just tax savings.