Govt unlikely to roll back tax plan on high-value life insurance

The government is unlikely to make changes to its budget proposal of taxing the total returns on high-value life insurance policies, two government officials said on Wednesday, amid demands by insurance companies to reconsider the move.

The government, presenting the 2023/24 budget on February 1, said it would scrap the tax exemption on the total returns upon maturity of life insurance policies if their aggregate premium exceeded Rs 5,00,000.

The move, which will come into effect for policies issued from April 1, has rattled insurers, with top company executives meeting Finance Minister Nirmala Sitharaman and finance ministry officials to petition them to reconsider the proposal.

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"The government is not keen to revise the Rs 5,00,000 threshold limit as it impacts only high net-worth individuals, and not the common man," said one of the officials, who did not want to be named.

The government will, however, consider allowing these investments to be adjusted for inflation, also known as 'indexation', the official added.

The Department of Financial Services has suggested that the Prime Minister's Office allow these indexation benefits, said another government official, adding the PMO will make the final decision.

India's finance ministry did not reply to Reuters' emails and messages seeking comment. All three government officials declined to be named as the parliament is yet to pass the budget.

Indexation means adjusting purchasing price to the rate of cost inflation index (CII) that is published periodically by the income tax department.

If allowed, indexation will lower the policyholder's tax liability, said Kuldip Kumar, an independent tax consultant.

This benefit will mean insurance proceeds will be taxable as capital gains rather than "income from other sources", as proposed in the budget, which will reduce the tax rate to 20 per cent from 30 per cent, Kumar said.