The relaxations sought by the life insurance industry on the Budget announcement of taxing high-value policies with premiums of ₹5 lakh and above are currently under examination by the finance ministry.
Although deliberations are going on with the industry, no final decision has been taken on this matter, a senior finance ministry official said on Monday. The Centre, in this year’s Budget, proposed to tax proceeds from high-value life insurance policies (non-unit linked plans).
This is to plug the arbitrage that highnet worth individuals (HNIs) are using to get tax-free returns on their high-value insurance policies through Section 10 (10D) of the Income Tax Act. Soon after the announcements, the life insurance industry agreed with the government’s broad idea of taxing HNIs.
However, the premium threshold of ₹5 lakh, being used as a benchmark to classify policyholders, is something that they are taking an exception to. The industry has asked the government to raise the threshold to ₹10 lakh from ₹5 lakh.
Further, instead of taxing the proceeds from these policies under income from other sources, which could result in negative returns for the policyholders (adjusted for inflation), the benefits of redefined super HNI should be taxed under long-term capital gains (LTCG) with indexation benefits. This is given the long-term nature of the products.
“It is being examined. This was introduced in the Budget and the insurance industry has made some suggestions. The industry has asked for a few clarifications, which will be issued in due time. But on the premium threshold of ₹5 lakh, we have heard the industry’s views and deliberations are on,” the ministry official said. The official, however, added that the impact of this move by the government is unlikely to be significant on the insurance industry.
“But it doesn’t mean we are not appreciating their concerns. Discussions are still going on,” the person quoted above said. According to an initial assessment, ICICI Prudential Life Insurance expects the Budget decision to impact its annualised premium equivalent (APE) and value of new business (VNB) margin by 6 per cent. For HDFC Life, the impact could be 10–12 per cent on APE and 5 per cent on VNB.
Life Insurance Corporation (LIC) has said that the impact on it is around 1.8 per cent of APE. However, none of these estimates have taken into account the fact that customers would have taken to other life insurance companies.
Meanwhile, when asked if the current chairperson of LIC will get an extension, the official said, “We are evaluating the possibilities on what could be done.” Chairperson M R Kumar, appointed in 2019, received an extension in 2022, ahead of the initial public offering (IPO) of the insurance major. Reports say Kumar may get an extension of six months.
Separately, the official clarified that there is a broad agreement among stakeholders that the obligatory cession enjoyed by GIC Re needs to come down. This comes amid reports that the committee, which recommends the percentage of obligatory cession that general insurers have to cede to GIC Re, has suggested that the obligatory cession be brought down to zero from the existing 4 per cent.