Explain the new tax regime on term insurance products

Term plans can be popular insurance product for its protection benefits. Apart from its protection benefits, many of you might buy term insurance for its tax efficiency. However, the introduction of the new tax regime might put you in a dilemma of whether to purchase a term plan or not. The removal of tax exemptions under Section 80C of the Income Tax Act, 1961, can restrict the purchase of term plans as well as mutual funds. Additionally, it can pose a threat to many insurance companies.

For many of you, tax exemptions can be an essential incentive to buy term insurance. However, the term insurance tax benefit can be eligible under Section 80C of the Income Tax Act, 1961, if the sum assured amount is 10 times the annual premium. According to Section 80C, you can qualify to claim a deduction of Rs. 1,50,000 on your taxable income.

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After the announcement of the new tax regime in accordance with the Union Budget 2020, you might not be eligible to claim deductions as per Section 80C. If you are earning between Rs. 5 Lakh to Rs. 7.5 Lakh, you might opt for the new tax regime. Therefore, you might not have incentives left to buy a term insurance policy.

A term insurance policy can be sub-subject of traditional life insurance that can aim for the financial protection of your family. Due to its protection benefits, tax-saving might not be your sole decision maker at the time of purchase. However, the term insurance tax benefits can be one of the motivational factors that can attract you towards it. Many insurance companies still believe that very few people might turn to the new tax regime. After the launch of the new tax regime, there has been a significant rise in life insurance stocks.

Apart from online term insurance plans, the new tax regime has affected other options, such as mutual funds. If you select the old tax regime under mutual funds, you can receive the tax exemptions under the Equity Linked Savings Scheme (ELSS).

Previously, mutual funds have experienced rigorous inflow under ELSS scheme since it has a 3-year lock-in period in comparison to life insurance products with a lock-in period of five years. If a large group of people choose the new tax regime, they might invest in ELSS schemes since it might offer an exemption under the new tax regime.

Millennials can be the generation that can opt for the new tax regime. The primary reason for the selection of the new tax regime can be to avoid the investment hassle since their parents bear their investment burden. Under such a scenario, term insurance plans and ELSS schemes can take a hit. Moreover, the new tax regime might develop more tax liability as compared to the current schemes.

To sum up, the new tax regime should be selected wisely with the help of the right financial products. Although term insurance plans can provide tax benefits, see to it that you understand its impact on the old as well as the new tax regime. Since term insurance tax benefits might not be applicable under the new tax regime, you might be unable to reap the benefits under the new regime with a term plan.


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