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. 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, 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.
