Amid industry calls to withdraw the Union budget’s proposal to tax high-value insurance policies, officials said the government is unlikely to make any changes to its plan, Reuters news agency reported. In Budget 2023, Finance Minister Nirmala Sitharaman proposed “limiting the income tax exemption of proceeds from very high value insurance policies”.
It has been proposed to tax the returns at maturity of life insurance policies if their total premium exceeded Rs 5 lakh in any one year. The plan goes into effect on April 1.
According to the report, insurance industry executives have met with Finance Minister Nirmala Sitharaman and Treasury officials to demand that they reconsider the proposal. However, an official told the news outlet: “The government is not interested in revising the Rs 500,000 threshold limit as it only affects high net worth individuals and not the common man.”
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However, he added that the government will consider adjusting these investments for inflation, also known as “indexing”. Indexation means the adjustment of the purchase price to the Cost Inflation Index (CII) which is regularly published by the Income Tax Authority.
Another official told Reuters that the Department of Financial Services had proposed to the Office of the Prime Minister (PMO) to allow these indexing benefits and the final call was being taken by the PMO.
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An independent tax adviser, Kuldip Kumar, said indexation, if allowed, will reduce policyholder tax liability, according to the report. Kumar said that benefit means insurance income will be taxed as capital gains rather than “income from other sources” as proposed in the budget, reducing the tax rate from 30 percent to 20 percent.
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