Finance Minister NirmalaSitharaman presented the budget on 1st February 2023. It was widely anticipated that it being the pre election year, Finance Minister will dole out some goodies for the insurance sector in form of increase in the deduction limit under 80C for life insurance sector as well as enhance the limit under section 80D.
However the industry was left disappointed as there was no increase in any deduction limit. Infact the FM announced that traditional policies where premium is above Rs. 5 lakhs, the income proceeds at the time of maturity, will no longer be eligible for exemption from income tax. FM has proposed that in cases where the aggregate premium for life insurance policies — other than unit-linked insurance plans (ULIPs) — issued on or after April 1, 2023, is above Rs 5 lakh, income at the time of maturity will not be exempt. It means any policy purchased from 1.4.2023 either individual policy or multiple policy having an aggregate premium of Rs. 5 lakhs and above will not be eligible for tax exemption from proceeds at the time of maturity.
Basic idea seems to be to tax the high networth individuals and bring them under the taxation net. The overall response from different corners of the industry has been negative as they were expecting some big bonanza announcement for fuelling growth in the insurance sector. Since last few months IRDAI has been on a mission for insurance for all by 2047 and has been taking proactive measures to achieve the objective.
It was widely perceived that in order to achieve the objective Government would support the Insurance sector by increasing the deduction and offering more benefits to the policyholders.
The writing is very clear on the wall. The Insurance Industry must prepare themselves for more surprises in coming years as Government seems to be in mood of removing the deduction and move towards new tax regime which offers no deduction. Already FM has announced the increase in the slab limit to Rs.7 lakhs where no deduction can be claimed and the new tax regime has been made as default.
The Insurance Industry must start thinking about the strategies to counter the after effects. Time has come when we need to increase the awareness level of consumers and convince them about the protection aspect of Insurance rather than focusing on taxation benefit.
The Insurance Industry will be keeping its figure crossed and hope that Government continues with the old regime of taxation benefits.
But as a Risk Management Strategy, Insurance Industry must chart out alternative plans to counter it, if at all government decides to remove exemptions in future. The Life Insurance Industry in particular must seriously deliberate and have an alternative plan ready.
The mindset of agency force also needs to be changed as till now they were more focussed on selling Insurance to save tax. In new scenario they must convince customers to buy insurance as a protection product rather than an investment product. Challenging times ahead!
