FM proposes to do away with tax exemptions on high value life insurance policies

New Delhi: Maturities of life insurance policies with an annual premium of Rs 5 lakh and above taken after April 2023 will now be taxed after Finance Minister Nirmala Sitharaman removed the tax exemptions on them.

For better targeting of tax concessions and exemptions, Sitharaman in her Budget on Wednesday proposed to cap deduction from capital gains on investment in the residential house to Rs 10 crore.

“Another proposal with similar intent is to limit income tax exemption from proceeds of insurance policies with very high value,” she said.

The proposal is “to provide that where aggregate of premium for life insurance policies (other than ULIP) issued on or after 1st April 2023, is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt”.

This will not affect the tax exemption provided to the amount received on the death of a person insured. It will also not affect insurance policies issued till March 31, 2023, the minister said.

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo, said that one of the major setbacks that are given in the finance bill is related to the taxability of the maturity proceeds of a life insurance policy.

“One should note that if an individual has more than one life insurance policy, which is issued on or after the 1st of April 2023 and also if the aggregate amount of premium of such policies exceeds Rs 5 lakh, then the maturity amount will be taxable,” Manchanda said.

The memorandum to the Finance Bill 2023 said that over the years, it has been observed that several high net-worth individuals are misusing the exemption provided under clause (10D) of section 10 of the Act by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies.

Kapil Mehta, a co-founder, SecureNow Insurance Broker, said the proposal will dampen the interest of individuals to buy high-value traditional insurance. The government’s proposal may, however, increase the focus on term plans and pure risk covers, which is good.

“A concern is that it should not result in a significant shift towards purely investment-oriented unit link insurances,” he said.

Following the announcement in the Budget Speech, shares of ICICI Prudential Life Insurance Company dropped 10.97 per cent to close at Rs 402.55 on the BSE.

HDFC Life Insurance Company Ltd fell 10.96 per cent, Max Financial Services Ltd (9.45 per cent), SBI Life Insurance Company Ltd (9.31 per cent) and Life Insurance Corporation of India (8.38 per cent).

Life insurance stocks witnessed significant selling-on-demand concerns as the budget proposals made life insurance schemes less appealing as a tax-saving instrument, said Cyril Charly, Research analyst at Geojit Financial Services.

In order to curb misuse of the existing provisions, the memorandum said: “It is proposed to tax income from insurance policies (other than ULIP for which provisions already exist) having premium or aggregate of premium above Rs 5,00,000 in a year. Income is proposed to be exempt if received on the death of the insured person”.

The minister also proposed that a TDS at the rate of 20 per cent will apply on the withdrawal of taxable components from Employees’ Provident Fund Scheme in case of non-submission of PAN. Currently, such withdrawals attract TDS at the rate of 30 per cent.