Nirmala Sitharaman, the minister of finance, announced on Wednesday that the government will start taxing insurance plans with yearly premiums over Rs 5 lakh that are issued on or after April 1, 2023. These insurance policies have previously been included in the category of investments that are tax-free. Unit-linked insurance plans (ULIPs) will not, however, automatically fall under the new regulations.
“(A) proposal…is to limit income tax exemption from proceeds of insurance policies with very high value,” Sitharaman said. From the new fiscal year 2023-24, earnings from insurance policies having an aggregate premium of more than Rs 5 lakh will not be exempt from income tax.
Under the new proposal, the tax exemption provided to the amount received on the death of a person insured will not be affected, Sitharaman said while reading out the Budget proposal.
She further added, “It will also not affect insurance policies issued till March 31, 2023.”
The FM mentioned that high net worth individuals (HNIs) have been unfairly utilizing this exemption when discussing the new proposal. It should be noted that the FM removed ULIP exemptions from the Budget last year, stating that investors will not be eligible for any exemptions if the premium for any given year exceeds Rs. 250,000.
Taxation of insurance policies:
From FY2024, the income from a savings life insurance policy that has a premium payment of more than Rs 5 lakh will be taxed when it matures.
The first-year premium alone, not the first year + renewal, will be subject to the Rs 5 lakh threshold. An individual investor who owns multiple policies is subject to this.
Following the announcement, insurance firms, including HDFC Life, SBI Life Insurance, ICICI Prudential Life Insurance Co, Life Insurance of India, General Insurance Corp, and Max Financial, were among the most negatively impacted stocks in the banking and financial sectors.
When the markets closed, shares of the Life Insurance Corporation (LIC), SBI Life Insurance, ICICI Prudential Life Insurance, and HDFC Life Insurance all saw declines of between 8.38% and 9.31%.
“We are disappointed with the recent budget announcement regarding the taxation of insurance premiums, as it will impact the high-value savings products that have been relied on by many customers. This, combined with the lack of increase in tax exemptions for premiums paid under health insurance, will negatively impact the growth of both savings and health insurance in India. Despite these setbacks, we remain committed to finding solutions and providing affordable insurance options to our customers while also adhering to regulations. We will also continue our efforts in promoting the importance of insurance and making it accessible to all,” said Yagnesh Dosshi, Co-Founder & Director, Raghnall Insurance Broking and Risk Management.