India’s 2023 Union Budget included key adjustments for the tax treatment of certain savings vehicles within the country’s direct taxation policy. Going forward, the inclusion of income from large insurance policies within the taxable income calculation will shift HNW savings in India away from insurance products. The tax regime in India is making swift changes.

India tax regime

As part of the new tax regime, a lengthy list of previous exemptions have been scrapped. The changes limit exemptions from the proceeds of high-value insurance policies. If the bundled premium issued on or after April 1, 2023 is above INR500,000 ($6,080), only income from policies with collected premiums of up to INR500,000 will remain exempted. Policies issued before April 1, 2023 are exempt from the new rules.

This move was taken to prevent HNW individuals from utilising insurance policies to reduce their tax burden. As a result, it will have a detrimental impact on the popularity of high-value insurance policies. Under the old tax regime, the life insurance maturity and surrender processes are exempt from tax even if the sum assured is more than 10 times the annual premium, which made such products attractive to individuals in the highest tax brackets.

Individuals can choose between the old and new tax regime for financial year 2022–23. Changes to tax brackets as part of the new tax regime are beneficial to HNW individuals, lowering their income tax burden and thus offsetting the impact on high-value insurance policies. Wealth managers will play a key role in advising each HNW client as to which tax regime will ultimately most benefit their particular circumstances.

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