The Financial Express
The finance ministry is unlikely to review the Budget proposal to tax income from aggregate insurance premium above `5 lakh in a year. According to senior government sources, a roll-back of the provision or a higher threshold, as demanded by the industry, is not on the cards as the tax will not impact purchase of insurance products by most consumers.
“Only high net worth individuals (HNIs) have the capacity to invest more than `5 lakh as insurance premium in a year. The Budget proposal will not impact investments by common people, including the middle class. It is only aimed at closing this loophole which is being used to save tax on high-value investments,” said an official source.
The ministry has gone through representations from the life insurance industry on this issue but is unlikely to propose any amendments in the Finance Bill, 2023, which will be taken up by Parliament for discussion and passage over the next few weeks.
Finance minister Nirmala Sitharaman had in the Union Budget 2023-24 proposed to tax income from all non-ULIP products, that is par and non-par where aggregate insurance premium paid in a year exceeds `5 lakh. The proposal, which is aimed at HNIs, will come into effect from April 1, 2023.
Previously, the government had removed a similar tax exemption on ULIPs with annual premium of over `2.5 lakh in a year and has also restricted tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of above `2.5 lakh annually. The objective was to rationalise tax exemptions for those with high incomes.
The life insurance industry has, however, been concerned about the impact of the proposal on sales and has also approached the finance minister requesting a higher threshold of premium at `10 lakh for levying the tax. They are also understood to have raised the issue with insurance regulator Irdai pointing out that such a tax would impact sales of life insurance and is at odds with the focus on increasing insurance penetration in the country.
The proposed taxation changes in the Budget is seen to have led to some pre-booking of high-ticket non-linked policies. Analysts are remaining cautious about the impact of the proposal on sales but believe that the long-term potential for the industry continues.
“Though the impact of the sale of policies entailing more than `5 lakh premium is estimated to be in the range of 2-15%, the main attention now swings to what changes life insurers bring to their product mix which, in turn, will affect value of new business margins,” said Emkay Global Financial Services in a recent note.
In a surprising turn, the first-year premium of life insurers contracted 16.8% to `2,848 crore in February this year from `27,465 crore a year ago. Typically, the last quarter of the fiscal sees high sales due to tax saving by individuals.
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