The government is unlikely to make changes or roll back its budget proposal to tax returns on high value insurance policies.

The Union budget had proposed that maturity amount for policies with a cumulative annual premium in excess of Rs 5 lakh will not be eligible for a tax rebate under section 10(10D) of the Income Tax Act. The announcement is applicable on non-unit linked policies that are bought after March 31.

However, the proposal does not impact tax exemption if any amount is received as death benefit.

The move has rattled insurers with top company executives meeting finance ministry officials to petition them for reconsidering the proposal. The life insurance industry has also proposed to increase the threshold premium from the proposed Rs 5 lakh to Rs 10 lakh. Without an increase in threshold, policyholders could end up with negative real return after adjusting for inflation.

Senior life insurance executives told The Telegraph that high net-worth individuals typically choose to invest in these policies to avoid market volatility. The rate of return is as high as 7.5 per cent and it is locked for a longer tenure at the time of purchase. This means that the principal amount as well as returns are shielded from market volatility. Moreover, the maturity benefits were tax free before the budget proposed the new threshold.

While it remains to be seen whether the government acts on the industry representation and brings out any clarification, industry sources indicated that a rollback is not on the cards given the proposal impacts only high net worth individuals and not the common man.

However, reportedly there has been a suggestion from the Department of Financial Services to the PMO on whether these investments can be adjusted for inflation, typically through indexation.

If this goes through, it will lower the policyholder’s tax liability at the time of maturity, said Kuldip Kumar, an independent tax consultant, according to a Reuters report.

At present maturity proceeds from insurance policies if not exempt under section 10(10D) of the Income Tax Act, would be included under the head “income from other sources” while computing the tax liability. This implies the applicable tax rate on the proceeds would be at the slab rate of the policyholder, which for a high net worth individual would be 30 per cent.

If indexation is allowed, the proceeds would be taxable as long term capital gains where the rate of tax is 20 per cent after indexation, thus lowering the tax liability.

“The amount received in such cases should be taxed under the head income from other sources. However, only the excess amount over the aggregate premium should be considered for tax purposes,” tax advocate Narayan Jain said.