Finance ministry looking into relaxing Tax on high-value policies with premiums of at least 5 lakh rupees

The Finance Ministry is currently looking at the relaxations requested by the life insurance industry over the Budget announcement to tax high-value policies with premiums of at least 5 lakh rupees.

A senior finance ministry official stated on Monday that although discussions with the industry are ongoing, no decision has been made in this regard. In this year’s Budget, the Center proposed taxing the revenues from expensive life insurance policies (non-unit linked plans).

This is intended to stop the arbitrage that high-net-worth people (HNIs) use to obtain tax-free returns on their expensive insurance policies under Section 10 (10D) of the Income Tax Act. In the immediate aftermath of the announcements, the life insurance sector endorsed the government’s broad proposal to tax HNIs.

But, they are objecting to the benchmark premium threshold of 5 lakh, which is used to categorise policyholders. The business sector has asked the government to increase the threshold from 5 lakh to 10 lakh.

Additionally, the benefits of redefining super HNI should be taxed under long-term capital gains (LTCG) with indexation benefits rather than income from other sources, which could produce negative returns for the policyholders (adjusted for inflation). Given that the items are long-lasting, this makes sense.

The item is being evaluated. The budget included the introduction of this, and the insurance sector has offered some recommendations. A few clarifications that the industry has requested will be provided when the time is right. We have, however, heard the industry’s opinions and discussions on the premium barrier of 5 lakh are ongoing, the ministry official added.

But that doesn’t imply we don’t value their worries. Talks are still ongoing, according to the aforementioned source. ICICI Prudential Life Insurance predicts that the Budget decision will have a 6-percent impact on both its annualised premium equivalent (APE) and value of new business (VNB) margin. The effect on HDFC Life might be between 10 and 12 percent on APE and 5 percent on VNB.

According to Life Insurance Corporation (LIC), the impact will be about 1.8% of APE. None of these projections, however, account for the reality that clients might have switched to other life insurance providers.

The official responded, “We are analysing the possibilities of what could be done,” in response to the question of whether the current LIC chairperson will receive a further term. Prior to the insurance industry’s significant IPO in 2022, chairperson M R Kumar, who was appointed in 2019, received an extension. According to reports, Kumar could receive a six-month extension.

Separately, the official made it clear that there is broad stakeholder consensus that the mandatory cession enjoyed by GIC Re needs to end. This is in light of rumours that the committee, which determines the amount of mandatory cession general insurers must provide to GIC Re, has recommended that the mandated cession be reduced from its current 4 percent to zero.