Life insurance policies are favourites of conservative investors. Not that these were attractive or even investments in the first place. The perception of safety and assured, even if low returns was enough to attract rich and lay investors alike in droves.

Budget 2023 has brought life insurance policies of all hues under the tax ambit, subject to certain thresholds.

Taxation across the board

Unit-linked insurance plans were earlier brought under the tax net if the annual premium exceeded ₹2.5 lakh. That limit stays.

But for other life insurance policies such as moneyback or endowment covers, there was no such taxability. Budget 2023 has made proceeds from such policies taxable in the hands of investors.

The saving grace is that for taxability the annual premium should not exceed ₹5 lakh, which is still a sufficiently high threshold.

Demand for single-premium products, popular among high net-worth individuals, are likely to be hit particularly hard. The tax-free status on life insurance proceeds was a big draw even if returns were barely 4-6 per cent at best. In other words these would become ‘exempt, exempt, taxable’ (EET) products.

However, the proceeds received upon death will continue to be tax-free.

Not surprisingly, the stocks of the biggest players in the industry — LIC, HDFC Life, ICICI Prudential Life and Max Financial Services — were down 8-12 per cent in trade on Wednesday.

If anything, this proposal should push investors to avoid these low-return and unattractive products that neither give good insurance cover nor significant investment returns.