Insurance execs to FM Sitharaman: Relax taxing high-value policies | Business Standard News

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They want the threshold of premiums beyond which the income from these policies is taxed raised to Rs 10 lakh per year from the current Rs 5 lakh

The insurance regulator is currently looking into the proposal, an official said

Insurance industry executives on Tuesday met Finance Minister Nirmala Sitharaman to seek relaxation on the Budget announcement of taxing income from high-value life insurance policies.

As a part of a Confederation of Indian Industry (CII) representation, the life insurance industry has sought an increase in the threshold of premiums beyond which the income from these policies are taxed to Rs 10 lakh per year from the current Rs 5 lakh.

Further, they are also asking the government to tax the gains on such policies as debt mutual funds instead of taxing them at the marginal tax rate. The Union Budget last week proposed to tax high-value policies with premium aggregating to Rs 5 lakh per year to plug the arbitrage that high-net worth individuals are using to get tax-free returns on their high value insurance policies through Section 10(10D). Though the ministry officials have clarified that the proposal was not directed at pure insurance products and, instead, is targeting investments made in the garb of insurance, analysts differ.

They said the decision is expected to hit the top line and margins of life insurers going forward. But in the short term, they will see higher sales of such policies because the proposal becomes effective from April 1. The FM was apprised of the fact that the industry was in agreement with their intent to tax the high net worth individuals. But, it’s the classification of HNIs – aggregate premium over Rs 5 lakh per year – that is a matter of concern.

According to disclosures, ICICI Prudential Life Insurance’s share of business of non-unit linked policies with annual premium of above Rs 5 lakh is about 6 per cent of the total APE for nine months of FY23.

While the ratio stands at 9 per cent Max Life, it is over 10 per cent for HDFC Life. However, the impact for SBI Life could be as low as 1 per cent.

“We find bringing traditional insurance policies under tax net as directionally negative for the sector. While the ratio of high-ticket policies (above Rs 5 lakh) is currently low, the average for non-par may be about Rs 1–2 lakh,” Kotak Institutional Equities had said in its report.

According to Macquarie Research, for HDFC Life, assuming it does not tweak the products or the sales process, the impact is 10-12 per cent on APE, and 5 per cent on value of new business (VNB). However, this assessment doesn’t include the likelihood of their policyholders breaching the Rs 5 lakh limit as they could be having policies with other life insurers.

“The VNB impact is lower because some of these high-ticket policy variants actually have lower margins due to the shorter tenure of the products. Also, there are some par products that inherently have much lower margins than company reported margins of 26-27 per cent,” the report said.

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