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The Union Budget 2023-24 has proposed to limit the income tax exemption on the proceeds of high value life insurance policies.

Mooted as part of an emphasis on better targeting of tax concessions and exemptions, the proposal means that only income from life insurance policies with an aggregate premium up to ₹5 lakh will be exempt from taxation.

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“It is proposed to provide that where aggregate of premium for life insurance policies [other than ULIP] issued on or after April 1, 2023 is above ₹5 lakh, income from only those policies with aggregate premium up to ₹5 lakh shall be exempt,” the Budget documents said. The proposal will not affect the tax exemption provided to the amount received on the death of the insured person, nor will it affect insurance policies issued till March 31, 2023.

This income will be taxable under the head “income from other sources”. Deduction will be allowed for the premium paid, if such premium has not been claimed as deduction earlier. There will not be any change in taxation for polices issued before April 1, 2023.Preventing misuse by the rich.

The proposal follows a measure initiated in the Finance Act, 2021 pertaining to the proceeds of ULIP policies, where the premium paid, for any year, exceeded ₹2.5 lakh. Both the previous and present moves are aimed at curbing misuse of the exemption by high net worth individuals, who invest in policies having large premium contributions and then claim exemption on the sum received under such policies.

The latest proposal, coupled with the income tax benefits that were announced in the Budget for those under the new tax regime, seems to have affected investor sentiments in life insurance stocks, with the shares of LIC, HDFC and SBILife taking a hit on Wednesday.

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