Government Announces New Tax on Insurance Policies with Premiums Above ₹ 5 Lakhs

Finance Minister announced that the government will now impose tax on insurance policies with an annual premium above ₹ 5 lakhs. This is applicable on policies issued on or after 1st April’23.

The recently announced budget 2023 has removed the tax incentives on income from high-value insurance policies. However, as per the union budget 2023 proposal the new rule will not affect ULIPs and the death benefit received after the death of the policyholder. It will also not affect insurance policies issued till March 31st, 2023.

Important Points To Note About The New Taxation Rule

The new rule was announced in an attempt to limit the undue tax-saving advantage enjoyed by high net-worth individuals (HNIs) because of the tax exemptions on insurance policies. Similarly, in the previous budget, tax exemptions for ULIPs with premiums above ₹ 2.5 lakhs were removed.

Here are some important points to be noted as per the new tax rule:

A).  If a savings insurance policy has a premium of more than ₹ 5 lakhs, the maturity benefit or income from the policy will be taxed.

B).  The limit of ₹ 5 lakhs is applicable on the first-year premium and not the first-year plus renewal.

C).  The new rule is also applicable if the aggregate premiums from multiple policies held by an individual are more than ₹ 5 lakhs in a year. The sum thus received will become taxable.

D).  There are no deductions for health insurance and life insurance policies under the new income tax regime because income upto ₹ 7 lakhs is tax-exempt.

Impact Of Removing The Tax Exemption On Traditional Insurance Policies

The insurance industry is disappointed after the announcement of the tax exemption removal in traditional insurance policies. The impact could be seen in the share prices of leading insurance companies such as ICICI prudential life insurance, HDFC life insurance, etc. The share prices came down by 4% to 11% after the budget announcement.

The LIC share price fell sharply by 8.38%, while SBI life insurance stock came down to 9.31%. Shares of ICICI Prudential Life Insurance and Shares of HDFC Life Insurance were down by 10.97% and 10.96% respectively. All these shares traded in red after the budget 2023 announcement.

Some of the expected impacts on the insurance market, as per the insurance experts are:

  • There will be a shift in consumer preference from traditional insurance policies towards pure risk covers like term insurance plans and investment-oriented unit link insurance due to removed tax exemptions.
  • There will be a negative impact on the business of insurance companies that have savings products in their portfolios such as HDFC life insurance with a portfolio of 30-35% savings products, ICICI prudential and Life Insurance Corporation having 20-25% savings products in their portfolios, and SBI life insurance and ICICI PruLife having 10% savings products in their portfolios.
  • As Indians have a tendency of buying insurance to get tax benefits, the removal of tax-free status will affect the market of life and health insurance products.
  • The individuals following the new tax regime will not have to pay any taxes for annual income upto ₹ 7 lakhs and thus no deductions for investment in insurance are applicable.


The government’s decision to remove tax benefits from high-value insurance policies is aimed to reduce cases of tax avoidance in the name of insurance. However, to attract investors (especially the ones under the new tax regime) to buy insurance products, the insurers will have to work towards more consumer-focused products. While shifting towards a simple tax structure and removing the tax incentives associated with traditional insurance policies, the government now needs to focus more on increasing insurance awareness and penetration.


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