After the Union budget for 2023-24 proved to be a brake on the life insurance industry, players in the sector are now coming together to approach the Ministry of Finance which is likely to seek a reversal or clarity on the tax announcement. Most importantly, it is seeking to increase the tax exemption cap to ₹10 lakh from ₹5 lakh announced in the Budget, and make the cap apply to individual policies and not the cumulative policies of an individual.
said a source Line of business that rather than individual companies, life insurers are expected to make representation through the Life Insurance Council or one of the CFO industry groups and that IRDAI will keep up to date.
budget proposal
The Budget proposed on Wednesday to limit the tax exemption of income from very high-value insurance policies. From April 2023, the aggregated premium of non-ULIP policies, of more than ₹5 lakh, will be taxable under “Income from Other Sources”. Following the announcement, shares of publicly traded life insurance companies fell between 8 and 12 percent.
Insurers have said that while the impact on their bottom line will be minimal because the taxes apply only to high-value policies, demand for such coverages is likely to drop substantially in the absence of any tax benefits, as insurers Traditional products have been largely sold as stable ROI and tax-free.
“It’s detrimental because a lot of companies were focusing on peerless books, which were very profitable. The yields of traditional policies are already muted and when you apply taxes, they lose their competitiveness,” said a senior official.
High demand
The other great demand of insurers is to standardize insurance taxation and thus tax these investments with the capital gains tax and not with the income tax, as proposed in the Budget.
This also includes raising the waiver limit for ULIP policies to ₹5 lakh from the current limit of ₹2.5 lakh, thus putting them on a par with other plans, industry participants said, adding that one of the clarifications sought is also if the same taxation the policy will also be applicable in mediclaim or traditional health policies.
“Having policies linked to units taxed as ‘capital gains’ and policies not linked to units taxed as ‘income from other sources’ can cause confusion in the mind of the end customer,” said Rushabh Gandhi, deputy chief executive of IndiaFirst Life Insurance.
“Insurance, as a category, takes precedence over capital gains tax in ULIPs and extending it to non-ULIPs might be prudent and in the best interest of the consumer,” he said.
Another industry suggestion includes removing taxes from the principal component of annuity product payments and taxing only the interest portion, industry players said.
