I am 25 and have started investing in life insurance policies and equity mutual funds schemes. Will the money received after 10 years be taxable in my hands?

I am 25 and have started investing in life insurance policies and equity mutual funds schemes. Will the money received after 10 years be taxable in my hands? 

Reply by Balwant Jain, a tax and investment expert

A word of advice. Please not mix insurance and investment. Do not buy life insurance policies for the purpose of investment. By mixing insurance and investment you neither get good returns nor adequate risk cover. Buy term insurance equal to 12-15 times of your annual income for life cover and invest the differential amount in appropriate category of equity mutual fund scheme depending on your risk appetite, age, time horizon of the goal for making the investment.

Any long-term capital gains on sale of an equity oriented mutual funds schemes together with listed equity shares is exempt to the extent of Rs 1 lakh every year and beyond Rs 1 lakh it is taxed at flat rate of 10% plus applicable surcharge and cess. Capital gains on the category of investments will be treated as long term if these assets are held for more than 12 months.

As far as maturity proceeds of a life insurance policy including ULIP are concerned, the same are exempt under Section 10(10D) of the income tax act provided the premium paid in respect of such policy did not exceed 10% of the actual capital sum assured in any of the year during the premium paying term year for the policies taken after 1st April 2012. However, in case the policy was issued prior to this date then the premium should not exceed 20% of the capital sun assured for any of the year during the premium paying term. While computing 10% of the sum assured, any top up premium paid on ULIPs are also considered.

Any amount received as death claim from an insurance company is fully tax exempt without any conditions to the quantum of premium in relation to sum assured.

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In respect of non-ULIP policies issued after 1st April 2023, the above exemption will not be available even if the premium paid did not exceed 10% of the sum assured in case the aggregate of the premium paid for one or more non-ULIP policies taken together exceeds Rs 5 lakh in any of the premium paying term.

The above exemption is also not available in respect of ULIP policies issued after 1st Feb 2021 if the aggregate of premium paid for one or more polices taken together exceeds Rs 2.5 lakh in a year.