An idiot will never learn from his mistakes, a smart person will learn from his mistakes, but a genius will learn from other people’s mistakes
– Unknown
Recently, I had a rude shock. While filing my income tax return, I checked my 26AS statement. This is a place where we can see all the taxes that has been deducted at source, against our PAN card number. Now, when I checked it, I saw ICICI pru life insurance had deducted some amount. When, I checked the email sent to me by ICICIPRU life, I came across a form 16. Now, we associate F16 with the one our employers give. But, it looks like anyone who does any tax deductions at source needs to give this. Let’s get some background info on this story.
The story – Buying ULIP for saving tax – a costly mistake
10 years ago, I was told by the payroll to submit proof of tax saving investments. Now my knowledge of tax saving investment options in 2007 was quite limited. I did not have much time left and done of my friend suggested I buy an ULIP (unit linked insurance plan) as it offered best of both the worlds. It provided insurance as well as some investment potential to grow the money. I thought it’s a good idea. Subsequently, I bought an ULIP policy with annual premium of 50000 under the assumption that-
- This will help me in saving taxes.
- Money will grow tax free and the maturity proceeds will be tax free.
In the same year, I started reading a bit more about personal finance. I came to know that ULIPs are expensive product that neither provide adequate insurance, nor do they provide adequate return.
Having already made the mistake of buying this, I was advised that I at least pay three premiums and then let the policy mature after 10 years.
This year, the policy matured and I received around 2.3 lacs on my initial investment of 1.5 lacs. I had made the three annual premium payments each year in January between 2007 and 2009.
Here comes the tax trouble
Now, I was under the impression that this maturity proceeds of this policy were tax free. So, when I checked my 26AS and saw tax deducted at source, I was aghast. But as there was TDS, I needed to reconcile why the tax was deducted. Now I investigated the section under which tax was deducted.
Here comes the story of section 194 DA
Apparently, in late 2015, the government made some amendment in taxation of insurance policies. All policies bought after 2012 where the sum assured or insurance provided was less than 10times of the annual premium, the insurers were asked to deduct 2% (subsequently changed to 1%) of the maturity proceeds (if maturity amount is more than 1 lac) at source. More information here and here). For policy bought prior to 2012, if the sum assured was less than 5 times, TDS was applicable. I also came to know that I need to pay taxes on the maturity proceeds. I was under the impression that the maturity proceeds were tax free but here to my utter consternation, I was supposed to pay taxes. In fact, I came to know that such policies were always taxable and plug the leakage government introduced this rule of tax deduction at source. This will just help them in catching people who do not disclose them. Subsequently, I disclosed this in income from other sources and paid taxes. What’s more surprising is that I paid annual premium of 50000 and sum assured was 2.5 lacs. This should have meant that my policy should have been exempted. But when I looked more closely, my annual premium was 50000.004 and sum assured 2.5 lacs. I was sad and felt cheated that why ICICI pru life sold such a policy to me.
What post tax return I got?
As per my calculations, I got a post-tax return of just 3.75%.
Think before buying an insurance policy
Any insurance policy where sum assured is less than 10 times should be avoided. Furthermore, whenever you buy an insurance policy check its tax status of contribution as well as any subsequent payments that the insurance company will make to you.
What type of insurance policies should you buy?
Personally, I feel we should buy term life policies, health policy and vehicle insurance policies. Insurance policies aimed at combining the benefits of insurance and investments are not the best option.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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