Finance ministry looking into life insurers' tax relaxation plea

Officials say Budget's proposal to tax high-value policies of Rs 5 lakh and above is unlikely to have significant impact on the industry

The relaxations sought by the life insurance industry on the Budget announcement of taxing high-value policies with premiums of Rs 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 high-net 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 Rs 5 lakh, which is 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 Rs 10 lakh from Rs 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 Rs 5 lakh, we have heard the industry’s views and deliberations are on,” the finance 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 MR Kumar was appointed in 2019, and received an extension in 2022, ahead of the initial public offering (IPO) of the insurance behemoth. Reports say that Kumar may get an extension of six months.  

Separately, the finance ministry official clarified that there is a broad agreement among stakeholders that the obligatory cession enjoyed by General Insurance Corporation (GIC Re) needs to come down.

This comes among 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.

“Obligatory cession has its merits and demerits. GIC Re is the national reinsurer and has huge significance for our economy from the reinsurance perspective. There is a broad agreement that it should come down, and at some stage, not be an obligation but optional. But when that should happen is still being examined,” the official quoted above said.

The obligatory cession was reduced from 5 per cent to 4 per cent in FY23 and it has been retained at 4 per cent for FY24 also. Earlier, it was 20 per cent, which came down to 15 per cent, then to 5 per cent and now 4 per cent. Slowly, the regulator is making sure that the compulsory cession goes down and more re-insurers get into the market to develop India as a reinsurance hub.