Shares of insurance companies witnessed a massive decline on Wednesday after Finance Minister Nirmala Sitharaman, in Budget 2023, announced that it will limit income tax exemption from proceeds of insurance policies in certain cases.
“(A) proposal…is to limit income tax exemption from proceeds of insurance policies with very high value,” Sitharaman said.
In the FY24 Budget, the government announced that income earned from all life insurance policies, excluding unit-linked insurance plans (ULIPs), with a premium of above ₹5 lakh will be taxable. This is applicable for new policies, issued post April 1, and not for the existing ones.
In the Budget last year, the government had announced that unit-linked insurance policy (ULIP) holders will not enjoy an exemption from tax for premiums in excess of ₹2,50,000 on the proceeds in any year.
The government has basically taken away tax exemptions from traditional insurance plans if the annual premium is above ₹5 lakh. However, this does not apply to proceeds received on account of the death of the policyholder, the FM highlighted.
“Life insurance stocks witnessed significant selling-on-demand concerns as the budget proposals made life insurance schemes less appealing as a tax-saving instrument. The Union Budget has provided a higher impetus for individuals to shift to the new tax regime, which does not favour tax exemptions from investments in insurance schemes,” said Cyril Charly, Research analyst at Geojit Financial Services.
Charly further stated, “adding concerns to the growth outlook, it was also proposed to tax the income earned from life insurance products (other than ULIPS) issued after April 1, 2023, where the total annual premium exceeds Rs. 5 lakh. This has taken away the tax-free advantage of high-value traditional insurance policies, making them less attractive for investments. These proposals have come as a big blow to the sector, which had hoped for positive measures from the government to improve its penetration. This has caused investors to reconsider the sector's growth prospects, forcing them to stay side-lined.”
The new announcement comes as a blow to life insurers of high-value policies, especially market-linked policies. She pointed out that high net worth individuals have been taking undue advantage of this exemption.
This comes on the back of the government's push for taxpayers to adopt the new tax regime which does away with exemptions on all investments.
Even though the new tax regime has lower tax rates, it offers no exemptions on investments under Section 80C of the Income Tax Act.
"The government announced that only traditional insurance policies with an annual premium of up to Rs. 5 lakhs bought from FY24 onwards will be tax-exempt, and this is a bit of a dampener to the insurance industry. It may deter insurance penetration in India and also be a constraint on household financial savings (to some extent), which have already been on a decline in the past few years," noted Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life.