Life insurance stocks tumble as govt proposes to tax high premium policies

Govt aims to curb misuse of Section 10(10D) of I-T Act with this proposal; new rule applicable on policies issued on or after April 1, 2023

Shares of major life insurance companies tumbled on Wednesday following the finance ministers’ announcement to tax income from insurance policies having premium above Rs 5 lakh in a year, for policies issued on or after April 1, 2023.

“…over the years it has been observed that several high-net-worth individuals are misusing the exemption provided under Section 10(10D) of Income Tax Act by investing in policies having large premium contributions (as it is acting as an investment policy) and claiming exemption on the sum received under such life insurance policies,” the memorandum explaining the provisions in the finance bill noted. Section 10 (10D) of the income tax Act provides for income-tax exemption on the sum received under a life insurance policy, including bonus on such policy.

Essentially, income from traditional life insurance policies, other than unit-linked policies (Ulip) for which provisions already exist, having premium or aggregate of premium above Rs 5,00,000 in a year will be taxed. “This income shall be taxable under the head “income from other sources”. Deduction shall be allowed for premium paid, if such premium has not been claimed as deduction earlier”, the memorandum said. However, if the income is accrued due to the death of the insured person, then it will be exempted from taxation.

“The proposal talks about income being taxed. Ideally, the capital, which is the premium being paid, should not come under taxation,” said Vibha Padalkar, MD & CEO, HDFC Life Insurance.

“So, we would represent the government to bring us at par with, say, debt mutual funds wherein the premiums are deducted and only the capital gains, post indexation is taxed. The likely impact on our company will be 10-12 per cent on the top line and lesser on the bottom line. We will strive to sell more to middle-class customers, which has anyways been our stated objective. Secondly, as long as we are competitively priced compared to the alternative instruments, there will be demand for such products,” she said.

Shares of large life insurance companies like LIC, ICICI Prudential Life and HDFC Life took a beating after the announcement.

“The returns on traditional policies are already muted unlike Ulips. Now, the government has proposed to take away the 10(10D) tax benefit from insurance policies with over Rs 5 lakh premium. This could render these policies uncompetitive,” Vignesh Shahane, MD & CEO, Ageas Federal Life Insurance. "While the tax rate has not been made clear, I am assuming they could impose long term capital tax gains (LTCG) but it could also be on the income slab. It’s not a positive development for the life insurance industry."

Says Nilesh Sathe, former Irdai Member (Life), "In the past, the government had been taxing maturity proceeds (and not income, which is maturity minus premium paid) on short-term policies. So, we shall have to wait to find out how the government defines income."

"This is not likely to impact our retail policies, which have an average ticket size of Rs 50,000 – 100,000 but we do have some portions of high value policies. Having said that, I assume the high-net-worth individuals will continue to buy these policies because there is no other instrument which offers customers a fixed return for 20 – 30 years. Industry hopes that the indexation benefits offered to other instruments is offered to insurance as well so that policy holders are not disadvantaged compared to investors in other instruments", said Mahesh Balasubramanian, MD&CEO, Kotak Life Insurance.