Feb 01, 2023,13.57 IST

Budget 2023: Tax exemption removed in insurance policies with premium over Rs 5 lakh

Income from traditional insurance policies where the premium is over Rs 5 lakh will no more be exempt from taxes, Finance Minister Nirmala Sitharaman announced in her Budget speech.

The proposal intends to limit income tax exemption from proceeds of insurance policies with very high value.

It has been proposed that in cases where the aggregate premium for life insurance policies — other than unit-linked insurance plans (ULIPs) — issued on or after April 1, 2023, is above Rs 5 lakh, income will not be exempt.

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

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“You could have one insurance policy or multiple policies where the aggregate premium exceeds Rs 5 lakh in a year, the sum received will now become taxable,” said Archit Gupta, CEO, Clear.

However, the taxation proposal will be applicable only to those policies, which are issued on or after April 1, 2023. “The aggregation will take place only for those policies, which you bought from next financial year,” he said.

Notably, ULIPs with an annual premium of over Rs 2.5 lakh per year had lost this exemption in the 2021 Budget.

According to experts, the latest move by the government is negative for the insurance sector.

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“While this will dampen the interest of individuals to buy high-value traditional insurances, it will 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,” said Kapil Mehta, Co-Founder, SecureNow Insurance Broker.

Ahead of the Budget 2023-24, insurance companies were seeking a separate tax deduction basket for life policies and a higher limit for health premium from the government.

"The Union Budget has always been about introducing newer reforms in the system for the betterment of the country and the economy at large. Removal of tax-free status on certain life insurance policies, with premium above Rs 5 lakh will not dampen the spirit of insurers and consumers at large. People have understood the significance of insurance and living with a financial cushion, during the worst times in life. There could be a certain shift in focus from consumers towards term plans, pure risk covers and investment-oriented unit link insurance," said Balachander Sekhar, Co-Founder of RenewBuy.

The insurance sector was hoping the finance minister would include a few giveaways in this year's budget.

In the days leading up to the presentation of the budget, there was widespread speculation that Section 80C of the Income Tax Act would undergo revisions, and that existing deductions for health insurance premiums would be expanded.

However, the budget proposed that the income from policies (other than ULIPs) with an aggregate premium of up to Rs 5 lakh would be free from taxation.

"This will have a detrimental impact on the insurance business. In addition to this, individuals who fall under the new tax regime and have an annual income of up to Rs 7 lakh will not be required to pay any tax. This will have a negative impact on the insurance industry. I anticipate that in the years to come, we will be headed in the direction that will put us in a position where we will no longer be eligible for any tax benefits, such as deductions under 80C and health insurance,” said Rakesh Goyal, Director of Probus Insurance broker.

Bharat Phatak, director of Scripbox believes that the provision is a part of the government's attempts to stop large tax savings by ultra HNIs through insurance policies and market-linked debentures etc.

"The threshold of Rs 5 lakh annual limit appears a harsh. This may adversely affect the business for many insurance providers," he said.

Meanwhile, shares of insurance companies slumped up to 10% on Sitharaman's renewed thrust for the new tax regime, where deductions are not allowed.
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