On February 1st 2023, the Finance Minister of India presented the annual Union Budget 2023, which the government termed as the first budget of the Amrit Kaal. The budget has made way for a comprehensive review of the rules and regulations in the financial services sector to simplify the rules and reduce compliance costs.
While the experts suggest that there were a few hitches in the budget presented, the insurance sector was in for a more bitter surprise. Like others, the insurance industry had a lot of expectations from this budget like–
- Increase in the deduction limit on taxes on life insurance premiums paid under Section 80C of the Indian Income Tax Act
- A separate deduction on home insurance
- Rationalisation of the GST rates on the insurance premiums
- A tax-free status on the pension and annuity plans
However, none of these expectations was considered in this budget.
Let us look at the key proposals from the Union Budget 2023 impact on the life insurance sector
Over the past couple of decades, the taxation on life insurance policy proceeds has undergone a slew of changes. The amendments on taxation have been introduced to limit the tax exemptions to only high-risk and low-investment life insurance policies.
In 2003, the Finance Act, introduced taxes on all life insurance policies offering less than five times the insurance coverage. Later, it was increased to 10 times the insurance cover, vide the Finance Act, 2014.
To everyone’s surprise, the Budget 2023 proposes to levy taxes on the net proceeds from non-ULIP policies that will be issued on or after April 1st 2023, having an aggregate annual premium of more than INR 5 lakhs, under the ‘income from other sources’ head.
Furthermore, the premium paid for life insurance, including term insurance policy and claimed under any section like Section 80C of the IT Act, will not be allowed as a deduction while calculating taxable income. However, the budget 2023 proposes to continue giving tax relief on the amount received by the family after the policyholder’s demise.
The premium paid for term insurance, money back policy, whole life insurance and endowment plan will be considered to calculate the total premium payments. Although the standard term insurance plans do not offer any maturity proceeds, they will be considered for tax calculation purposes. Also, the premium calculations will be done at PAN level.
IRDA (Insurance Regulator and Development Authority) has been actively working to increase insurance penetration in India and promoting life insurance policies under the ‘Insurance for all’ by the 2047 mission. However, the experts believe that the announcements made in Budget 2023 will be a significant deterrent for IRDA to achieve its ‘insurance for all’ mission.
The proposals to levy taxes on life insurance premiums and proceeds are likely to have a significant impact on the life insurance business.
Many industry experts have suggested that the Union Budget 2023 has highly disappointed the insurance industry as it was expected that the government would increase the deductions under Section 80C and Section 80D to encourage people to purchase insurance policies. However, the government of India, in this Budget, has given tax incentives to people adopting the new tax regime.