The government’s removal of tax-free status for income from insurance policies with premiums above Rs 5 lakh is about taxing large investments under such policies, not the insurance itself, revenue secretary Sanjay Malhotra has said.
“Let me clarify that it is not about insurance… the tax exemption being withdrawn is on investments,” Sanjay Malhotra told CNBC-TV18 during a post-budget event on February 2.
“It is only the investments beyond a particular point where it no longer actually remains insurance but it becomes more of an investment rather than insurance, that we have removed the exemption and I think rightly so.” Pure-term insurance is totally exempt and continues to be so, the official said.
Budget 2023-23 has proposed that income from traditional insurance policies where the premium is over Rs 5 lakh will no longer be exempt from taxes.
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.
In a way, Budget 2023 has plugged the tax loophole that many large investors had been using. As insurance proceeds were tax-free, high networth individuals invested in life insurance policies to avoid paying tax on redemption proceeds.
The finance minister has only taxed non-life benefits. If the policyholder dies and the beneficiary receives the redemption proceeds, these won’t be taxed.
In Budget 2021, Sitharaman brought high-value Unit-Linked Insurance Plans (ULIP) in the tax net. All ULIPs with premiums exceeding Rs 2.5 lakh were made taxable at redemption. These ULIPs are treated as capital assets and profits and gains from such ULIPs are taxable as capital gains. This bought them on par with mutual funds, which are taxed at maturity; short-term or long-term capital gains tax.
Budget 2021 also made excess contributions to the Employees’ Provident Fund taxable. Ever since April 1, 2019, if an employee’s contribution to the provident fund – be it statutory or voluntary – exceeds Rs 2.5 lakh a year, the interest earned on this excess contribution is taxable.
