This has nothing to do with LIC. It has to do with the fact that LIC New Bima Bachat is a single premium plan.
Review: Salient Features of LIC New Bima Bachat
LIC New Bima Bachat is a participating traditional life insurance plan. It is a single premium plan.
Policy Term: 9, 12 and 15 years
No limit on Maximum Sum Assured.
Survival Benefit
For policy term 9 years: 15% of the Sum Assured at the end of each of 3rd & 6th policy year
For policy term 12 years: 15% of the Sum Assured at the end of each of 3rd, 6th & 9th policy year
For policy term 15 years: 15% of the Sum Assured at the end of each of 3rd, 6th, 9th & 12th policy year
Maturity Benefit
Payment of Single Premium (excluding taxes) along with loyalty additions
Death Benefit
In the event of death within 5 years, the nominee gets Sum Assured.
In the event of death after 5 years, the nominee gets Sum Assured along with Loyalty Addtions
What about returns from LIC New Bima Bachat?
Since LIC New Bima Bachat is a investment and insurance combo product, returns are important.
Moreover, since the plan is a participating plan, you can get a reasonable estimate of returns using certain assumptions. Not as crisp as non-participating plans.
This time, I will save the homework and leave it to you.
However, you can expect returns to be low as with other traditional life insurance plans.
I want to discuss another important aspect i.e. about taxation of benefits from this plan.
Do you purchase life insurance to save taxes?
Most of us purchase life insurance plans to save on income tax under Section 80C. However, unfortunate that may sound, it is a reality.
Another understanding is that the any benefit (maturity/death) received from the life insurance company is exempt from income tax.
What does the Income Tax Act say?
Not completely true.
Under Section 10(10D) of the Income Tax Act, it is clearly specified that
If the annual premium of a life insurance plan exceeds 10% of the Sum Assured, the proceeds from such life insurance plan are not exempt from tax.
Even for the tax benefit for payment of annual premium under Section 80C, you get tax benefit only to the extent of Actual Premium Paid or 10% of Sum Assured, whichever is lower.
There is minor exception in case of differently-abled persons or those suffering from specified ailments.
Suppose your life insurance plan has an annual premium of Rs 1.25 lacs and the life cover is Rs 8 lacs. In this case, tax benefit under Section 80C will be capped at Rs 80,000.
Moreover, any proceeds from such life insurance plans are taxable.
Now, there is TDS deducted for such policies. So, there is no way you can fly under the tax radar.
One aspect that I am not sure about is whether you get adjustment for the premium paid before you calculate tax liability. In my opinion, you shouldn’t. However, I have read about adjustment at many places. A good Chartered Accountant can answer this better.
What about Death Benefits?
Do note proceeds from a life insurance policy in the event of death of the policy holder are exempt from income tax irrespective of what is mentioned above.
What do Insurance Companies do?
These rules don’t impact term insurance plans because Sum Assured is typically a much higher multiple of the annual premium.
However, these rules can be a problem with insurance and investment combo products.
The good part is Insurance companies, in most cases, try to ensure that the annual premium is at least 10% of the Sum Assured. IRDA regulations also ensure this to some extent.
However, single premium insurance plans are likely to run into trouble.
Why?
Because you are paying the entire premium upfront for all the years. It is quite likely that the Sum Assured will be a much lower multiple of premium.
What about LIC Bima Bachat?
What do you expect?
LIC New Bima Bachat is a single premium life insurance plan.
The premium for a 30 year old for Sum Assured of Rs 10 lacs for policy term of 15 years is Rs 7.62 lacs. Clearly, the premium is too high for the product to qualify as
Therefore, if you have purchased the plan, be prepared to shell out income tax on any benefits received from the insurance plan.
Were you aware of this when you purchased LIC New Bima Bachat plan?
Quite possible you were never informed. You assumed that the payout will be exempt from income tax.
Any taxes will further bring down already low returns from this traditional plan.
Would you have invested if you knew the maturity proceeds or any other benefits from the insurance plan were taxable?
Perhaps, no.
If you are planning to invest in this product from LIC, do consider this aspect.