Finance Minister Nirmala Sitharaman said on Wednesday that the government will now levy the tax on insurance policies issued on or after April 1, 2023, with an annual premium of more than Rs 5 lakh. These policies are added to the tax-free investment basket. However, the new rules will not be implicit in unit-linked insurance plans (ULIPs).

“A proposal is to limit the income tax exemption on very high-value policy gains,” Sitharaman said. From the new fiscal year 2023-24 onwards, income from policies with gross premiums above Rs 5 lakh will not be exempt from income tax.

While reading the budget proposal, Sitharaman said under the new proposal, the tax exemption provided on the amount received by the insured upon death will not be affected.

“It also will not affect policies issued before March 31, 2023,” she said. Commenting on the new proposal, FM noted that high-net-worth individuals (HNIs) had misused the exemption.

It is worth noting that last year in the budget, FM removed the exemption for ULIPs, stating that ULIP investors will not enjoy any exemption if the premium exceeds Rs 2.5 lakh in any one year.

From FY24, if an investor pays a premium of more than Rs 5 lakh for an endowment life insurance policy, the policy income will be taxed upon policy maturity.

The Rs 5 lakh threshold will be applied for the first-year premium instead of the first-year + renewals. This applies to multiple policies held by individual investors.

Banking and financial stocks were hit hard after the announcement, with insurers such as HDFC Life, SBI Life Insurance, ICICI Prudential Life Insurance Co, Life Insurance of India, General Insurance Corp and Max Financial among the most affected.