After the Union Budget for 2023-24 proved to be a dampener for the life insurance industry, sector players are now joining hands to approach the Finance Ministry likely to seek a rollback of or clarity on the tax announcement. The most crucial thing being sought is to increase the tax exemption limit to ₹10 lakh from ₹5 lakh announced in the Budget, and to make the cap applicable on single policies and not on the cumulative policies held by an individual.

A source told businessline that instead of individual companies, life insurers are expected to make a representation via the Life Insurance Council or one of the CFO industry groups and that IRDAI will be kept in the loop.

Budget proposal

The Budget on Wednesday proposed limiting tax exemption from proceeds of insurance policies with very high value. Effective April 2023, aggregate premium from policies other than ULIPs, of over ₹5 lakh, will be taxable under ‘Income from Other Sources’. Following the announcement, shares of listed life insurance companies fell 8-12 per cent.

Insurers have said that while the impact on their bottomline will be minimal due to the taxation being applicable only on high value policies, demand for such covers is likely to fall substantially in the absence of any tax benefit, as traditional products have largely been sold as stable, tax free return on investment.

“It is damaging because a lot of companies were focusing on non-par book which was highly profitable. Returns on traditional policies are already muted and when you apply tax, they lose their competitiveness,” a senior official said.

Major demand

The other major demand from insurers is to make taxation uniform for insurance and thus tax these investments as per the capital gains tax rather than as per the income tax slab, as proposed in the Budget.

This is also includes raising the exemption limit for ULIP policies to ₹5 lakh from the current limit of ₹2.5 lakh, thus bringing them at par with other plans, industry participants said, adding that one of the clarifications sought is also whether the same taxation policy will also be applicable on mediclaim or traditional health policies.

“Having unit-linked policies taxed as “capital gains” and non-unit linked polices taxed as “income from other sources” may potentially cause confusion in the mind of the end customer,” said Rushabh Gandhi, Deputy CEO at IndiaFirst Life Insurance.

“Insurance, as a category has the precedence of capital gains tax in ULIPs and extending that to non-ULIPs might be prudent and in the best interest of the consumer,” he said.

Another suggestion by the industry includes removing tax from the principal component of annuity product payouts and taxing only the interest portion, industry players said.