The Union budget on Wednesday proposed to tax high-value policies on maturity if the premium paid in any year exceeds Rs 5 lakh. This will be for policies that are issued on or after April 1, 2023.

This shock to the domestic insurers comes at a time when the penetration in India is low as compared to several other countries. While the industry witnessed a rise in demand after Covid-19, the new rules threaten to crimp its growth rate and even benefit other competing instruments like mutual funds.

There was another disappointing news to the sector as finance minister Nirmala Sitharaman proposed to increase the rebate to Rs 7 lakh (from the current Rs 5 lakh) in the new income tax regime and reduced the number of slabs to five which may see more number of people flocking to this system. Unlike the old tax regime, the new structure does not provide any exemptions from insurance and other schemes.

“It is proposed to provide that where an aggregate of premium for life insurance policies (other than Ulip) issued on or after April 1, 2023, is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt’’, Sitharaman said.

She said that this will not affect the tax exemption provided to the amount received on the death of the person insured. Moreover, it will also not affect insurance policies issued till March 31, 2023.

Presently, Clause (10D) of section 10 of the Income Tax Act provides for income-tax exemption on the amount received under a life insurance policy, including bonus. However, individuals are liable to pay tax if the premium paid is more than 10 per cent of the sum assured.

The budget pointed out that since high net-worth individuals (HNIs) were misusing the exemption, the Centre had earlier slapped a cap on premium payout at Rs 2.5 lakh for Ulip policies to qualify for the tax relief on maturity. However, all other kinds of life insurance policies were still eligible for exemption irrespective of the amount of premium payable.

The new rule of Rs 5 lakh will not only apply to a single policy, but also to joint policies. For instance, a person with a premium of Rs 2.5 lakh on four policies in the name of a family of four will find to their dismay that they will end up paying tax on the maturity proceeds.