Life Insurers Seek Indexation Benefits On High-Value Savings Products: Report

The life insurance industry has asked the government for a breather on the tax burden faced by policyholders with high-value savings plans. At the centre of the request is a simple demand: apply indexation benefits to savings-oriented life insurance policies where annual premiums exceed Rs 5 lakh. In simple terms, insurers want inflation to be factored in while calculating the taxable maturity value, a method that has already been extended to several other investment products.

This issue came up in a recent closed-door meeting between senior life insurance executives and M Nagaraju, Secretary, Department of Financial Services (DFS), according to a CNBCTV18 report. The industry has made its case, and now it’s up to the Finance Ministry to respond.

To understand the demand, one has to rewind to the Finance Act, 2023. The Act introduced a significant change: maturity proceeds from non-ULIP life insurance policies purchased on or after April 1, 2023, would be taxable if the total annual premium crossed Rs 5 lakh. The move was aimed at preventing wealthy investors from using life insurance policies as tax shelters, instead of tools for genuine risk protection or disciplined savings.

But insurers argue the change. The lack of indexation, which adjusts the cost of investment for inflation, could result in disproportionately high tax outgo, especially for long-term policyholders. In contrast, debt mutual funds, even after losing some tax benefits last year, still enjoy indexation if held for a specific period. That’s the disparity insurers want addressed.

“Indexation is a well-established principle in taxation. If it’s applicable to other financial products, why not to long-term life insurance savings plans as well?” said one industry executive, speaking on condition of anonymity.

From the insurers’ perspective, the call for indexation is not about dodging taxes but restoring fairness. These policies, they say, are often designed with long horizons in mind, such as planning for retirement, child education, or generational wealth transfer. Penalising long-term savings with rigid tax rules, they warn, could chip away at the appeal of life insurance as a disciplined financial planning tool.

The government’s rationale behind its tax policy is seen as a move towards greater equity in taxation. After all, the Rs 5 lakh premium threshold anyway ensures small policyholders remain untouched. However, with high-net-worth individuals forming a significant chunk of new insurance investments, especially in savings-oriented plans, insurers might be worried the new tax regime may push them towards other asset classes that offer better tax treatment.

However, there is no conformity on whether the Finance Ministry is inclined to revisit the rules. But with the next Budget season only months away, insurers are raising their key demands.

The life insurers believe that extending indexation will boost investor confidence in insurance as a cornerstone of long-term savings and protection product in their financial portfolio.