Govt Unlikely To Roll Back Budget Proposal Of Taxing High-Value Insurance: Report

The move was proposed to tax the returns upon maturity of life insurance policies if their aggregate premium was above Rs 5 lakh in a year. The plan comes into effect on April 1

In Budget 2023, Finance Minister Nirmala Sitharaman proposed "to limit income tax exemption from proceeds of insurance policies with very high value."

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Amid the demand of the industry to roll back the Union Budget proposal of taxing high-value insurance policies, officials have said that the government is unlikely to make changes in its plan, reported news agency Reuters. In Budget 2023, Finance Minister Nirmala Sitharaman proposed "to limit income tax exemption from proceeds of insurance policies with very high value."

The move was proposed to tax the returns upon maturity of life insurance policies if their aggregate premium was above Rs 5 lakh in a year. The plan comes into effect on April 1. 

According to the report, insurance industry executives have met Finance Minister Nirmala Sitharaman and finance ministry officials to demand they reconsider the proposal. However, an official told the news agency, "The government is not keen to revise the Rs 500,000 threshold limit as it impacts only high net-worth individuals, and not the common man."

Although he added that the government will consider allowing these investments to be adjusted for inflation, also known as ‘indexation’. Indexation means adjusting purchasing price to the rate of cost inflation index (CII) that is published periodically by the income tax department.

Another official told Reuters that the Department of Financial Services has suggested to Prime Minister’s Office (PMO) to allow these indexation benefits, and the final call will be taken by the PMO. 

An independent tax consultant Kuldip Kumar, according to the report said that if allowed, indexation will lower the policyholder’s tax liability. Kumar said that this benefit will mean insurance proceeds will be taxable as capital gains rather than "income from other sources", as proposed in the budget, which will reduce the tax rate to 20 per cent from 30 per cent.