Union Budget 2024: Life insurers want relaxation in Rs 5-lakh annual premium cap for tax-free maturity proceeds

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Finance Minister Nirmala Sitharaman's decision in Budget 2023 to withdraw tax-free status to maturity proceeds of traditional endowment policies was a huge setback for many life insurance companies. Ahead of interim Budget 2024, insurance companies are hoping that the cap will be relaxed.

Despite Finance Minister Nirmala Sitharaman ruling out any spectacular announcements this time round, given it's an interim budget, they continue to hope for other positive surprises too.

For instance, Unit-linked life insurance policies (Ulip) with aggregate annual premiums of over Rs 2.5 lakh came in the line of fire in 2021, followed by traditional endowment policies with annual premiums of over Rs 5 lakh in 2023. To start with, life insurance officials are hoping that there won't be any such shock in store this year.

Also read: Union Budget 2024 and the taxpayer: Higher basic exemption limits, more medical deductions needed

Relax the Rs 5-lakh premium cap on tax-free maturity proceeds

In Budget 2023, the life insurance industry suffered a blow in the form of the withdrawal of tax-free status to maturity proceeds of high-value endowment policies. From April 1, 2023, maturity proceeds of fresh traditional policies with an aggregate annual premium of over Rs 5 lakh stopped enjoying this critical tax benefit.

Life insurers are hoping that the government will relax this rule. “The industry has been seeking a review of the Rs 5 lakh cap and urging the government to consider increasing it to Rs 10 lakh. We may see some changes on that front,” says Sumit Rai, MD and CEO, Edelweiss Tokio Life Insurance.

Also read: Budget 2024: What the salaried and the self-employed expect from the budget | Simply Save

Need parity with NPS

The industry wants the government to take steps to facilitate deeper insurance and pension penetration. Extending NPS tax benefits to insurance companies’ pension policies can help expand pension coverage, industry officials feel. Currently, apart from deductions of up to the overall 80C limit of Rs 1.5 lakh, NPS investment also enjoys an additional tax break of up to Rs 50,000 under section 80CCD (1B). Employers’ contribution to employees’ NPS of up to 10 percent of their basic pay is also allowed as a deduction.

“With a significant number of people heading towards retirement age in the next decade, incentivising the purchase of products in the pension category becomes crucial in this interim budget. Life insurance annuity or pension products should be aligned with the National Pension Scheme (NPS). We also advocate for an additional deduction of Rs 50,000 or more,” says Tarun Chugh, MD and CEO, Bajaj Allianz Life Insurance.

Tax-free status to annuity income

This has been a long-standing demand of the life insurance industry, which provides annuities not only for life insurance pension policies but also for the National Pension System’s (NPS) 40 percent corpus that has to be converted into annuities. Industry officials believe abolishing tax on annuities will help retirees as well as the pension sector.

“Many Indians don't save enough for retirement, and the gap between needed and available retirement funds is expected to reach $85 trillion by 2050. Investing in pension and annuity products is crucial for income after retirement. Making taxes simpler or removing them for these products will encourage more people to invest in these important financial protection plans,” says Satishwar B, MD and CEO, Aegon Life Insurance.

Separate deduction for term policies, also under new regime

India’s penetration, despite the growing awareness and efforts by the regulator, government, and other stakeholders, continues to be low at 4 percent.

“India faces a severe issue of inadequate insurance, that is, when a family’s primary earner passes away, the money left for the survivors to live and settle debts is usually less than what’s actually needed. So, we request the government to consider introducing a separate tax deduction limit for term life insurance under the old tax regime, as the current Section 80C also covers other tax-saving products,” says Prashant Tripathy, MD and CEO, Max Life Insurance.

Given the indispensability of protection cover, he feels deduction on life insurance should also be allowed under the new, minimal exemptions regime.