Investments post 31 March will be taxable at maturity: Strategies investors can adopt

The Finance Minister has announced a slew of changes in the tax regime while presenting the Union Budget 2023 at the Parliament on 1 February 2023. One of the key announcements among these was the finance minister’s proposal regarding high-value insurance purchases. The FM declared that for insurance policies (excluding ULIPs), where an aggregate premium is over Rs 5 lakh, the maturity amount will not be exempted from tax.

Notably, this will be applicable for the life insurance policies issued on or after 1 April 2023, and income from only those policies with aggregate premiums up to Rs 5 lakh shall be exempted. Thereby, it will not affect the insurance policies issued till 31 March 2023. So, for investors looking for high-value insurance purchases to make a long-term gain out of their insurance policies, purchasing a policy before 31 March can be the best move to avoid taxation on the maturity of the policies.

In simpler words, investment opportunities improve one's financial stability in two ways, i.e., Returns + Tax Savings. To avail of both benefits, investors need to invest in a lucrative plan before March 31st; because after 31 March 2023, they would not be able to enjoy tax benefits. The move can also be decoded as an incentive for taxpayers to streamline their life coverage by buying term insurance, since, for most taxpayers; the premia is more likely to remain under Rs 5 lakh with term insurance.

This would also enable the taxpayers to get better results in terms of both coverage and investment, and tax-saving investment needs can be met through a combination of small savings, provident fund, and ELSS, in which the returns and liquidity may both be better as compared to the traditional life covers. Also, taxing the high-value insurance purchase might help debt mutual funds, and it can be predicted that high-net-worth individuals will now use debt mutual funds instead of insurance products.

Generally, the income plans preferred by investors are based on guaranteed returns and annual tax-free returns, and the new rule might have a significant impact on the net worth of investors who are planning to invest an amount premium above Rs 5 lakh. For them, the best strategy would be to either purchase a high premium before 31 March to leverage tax benefits or to consider mutual funds as a better alternative.