Budget 2023: Govt to impose tax on insurance policies with premiums above Rs 5 lakh

Budget announcements: Finance Minister Nirmala Sitharaman on Wednesday said that the government will now levy tax on insurance plans issued on or after April 1, 2023, whose yearly premium is above Rs 5 lakh. Till now, these insurance policies were added to the tax-free basket of investments. However, the new rules will not be implied on unit-linked insurance plans (ULIPs). 

“(A) proposal…is to limit income tax exemption from proceeds of insurance policies with very high value,” Sitharaman said. From the new fiscal year 2023-24, earnings from insurance policies having an aggregate premium of more than Rs 5 lakh will not be exempt from income tax. 

Under the new proposal, the tax exemption provided to the amount received on the death of a person insured will not be affected, Sitharaman said while reading out the Budget proposal. 

"It will also not affect insurance policies issued till March 31, 2023," she said. 

Talking about the new proposal, the FM noted that high net-worth individuals (HNIs) have been taking undue advantage of this exemption.

It is to be noted that last year in the Budget, the FM had removed exemptions for ULIPs stating that ULIP investors will not enjoy any exemption if the premium for any year exceeds Rs 250,000. 

Taxation of insurance policies 

From FY2024, if an investor is paying a premium of more than Rs 5 lakh for a savings life policy then, on maturity the income from the policy will be taxed.  

The threshold of Rs 5 lakh will be applicable on the first-year premium and not first-year + renewal. 

This is applicable to multiple policies held by an individual investor. 

Market rout 

Following the announcement, banking, and financial stocks took a big hit, where insurance companies, such as HDFC Life, SBI Life Insurance, ICICI Prudential Life Insurance Co, Life Insurance of India, General Insurance Corp, and Max Financial, were the most affected. 

When the markets closed, shares of Life Insurance Corporation (LIC) fell 8.38 per cent, SBI Life Insurance was down 9.31 per cent, ICICI Prudential Life Insurance 10.97 per cent, and HDFC Life Insurance was down nearly 10.96 per cent. 

"We are disappointed with the recent budget announcement regarding the taxation of insurance premiums, as it will impact the high-value savings products that have been relied on by many customers. This, combined with the lack of increase in tax exemptions for premiums paid under health insurance, will negatively impact the growth of both savings and health insurance in India. Despite these setbacks, we remain committed to finding solutions and providing affordable insurance options to our customers while also adhering to regulations. We will also continue our efforts in promoting the importance of insurance and making it accessible to all," said Yagnesh Dosshi, Co-Founder & Director, Raghnall Insurance Broking and Risk Management.