The finance minister announced in the February budget the scrapping of the tax exemption on maturity proceeds of non-unit linked insurance plan (ULIP) policies purchased after April 1 with annual premiums above ₹5 lakh. That had led to a rise in pre-booking of high-ticket, non-linked policies in March.
LIC said the number of policies above the threshold is 0.04% of the total policies and 3.5% in terms of value.
“We can easily make up for the impact through sale of other products and other lines of business,” an LIC executive told analysts on the call.
While LIC said its strength lies in participating products and it won’t compromise on that, the insurer is diversifying its product mix by increasing its non-participating business share, which rose to 8.89% in FY23 from 7.12% in FY22.
According to some estimates, the impact of the sale of policies with more than Rs 5 lakh premium could be in the range of 2-15% from this financial year.
“From our perspective, less than 1% of the number of policies and 5% of value of policies are above Rs 5 lakh premium. The impact will not be much as insurance companies will find a way to spread the amount to family members,” said Vighnesh Shahane, MD and CEO, Ageas Federal Life Insurance. “A similar cap had come in for ULIPs at Rs 2.5 lakh and it didn’t make any difference to ULIP sales.” From February 2021, the tax exemption under clause (10D) of Section 10 of the Income Tax Act didn’t apply to ULIPs if the amount of premium payable during the term of the policy exceeded Rs 2.5 lakh. Earlier, any return on ULIPs after five years of the initial lock-in was tax-exempt.
There is some ambiguity over the tax treatment on an aggregate basis with regard to policies with premiums above Rs 5 lakh, analysts said.
“Under the new rules, the tax will be applicable on the aggregate premium of multiple insurance policies held by one policyholder exceeding Rs 5 lakh,” said Girish Vanvari, founder, Transaction Square. “A policyholder will have to aggregate all policies bought from various companies and then pay tax on the amount which exceeds the aggregate premium of Rs 5 lakh. Though this change has led to some ambiguity, insurance companies will need to re-orient themselves to the new normal.”
The new changes mean that from April 1, the maturity and surrender proceeds of non-ULIP policies are no longer tax-free if the annual premium exceeds Rs 5 lakh.
The insurance industry is awaiting a detailed circular on tax treatment of high-ticket size, non-ULIP products, just like the ULIPs guidelines, said an insurance executive.