Leading private life insurer HDFC Life's chief executive Vibha Padalkar told PTI that she stares at 10-12 per cent hit on the company's top-line with the Budget proposal to tax life products having annual premium of over ₹5 lakh.
She also fears that the increased tax exemption bracket of ₹7 lakh and the steep reduction in the maximum surcharge on the affluent to 39 per cent from 42.74 per cent earlier may nudge them to spend more and save less.
This can have many cascading impacts on the macro sector by way of a spike in the already high inflation, apart from the life insurance sector which has been facing sales issues since the Covid pandemic as people were not investing in long-term savings. And since the opening up of economic activities, many are on a "revenge spending mode" and not investing in financial products even now.
Given the overall increase in incomes, the government should have either ignored the new tax levy on insurance products or it should have imposed tax on products with premium of ₹10 lakh or upwards. At this level, it will definitely hit the industry hard, she added.
The industry was expecting a proposal to offer composite lincence for the insurance sector wherein life insurers would be allowed to renter the health business which they were doing till 2015. Besides, the insurance sector players were also expecting some positive moves on the annuity products front.
Tarun Chugh, chief executive of Bajaj Allianz Life, said the tax proposal on higher value non-Ulip or traditional life policies "is bit of a dampener for the insurance industry and for increasing penetration of insurance and household financial savings."
"We as a market still have quite low insurance penetration and there is a need to provide measures and incentives to boost that in the coming years. Also, household financial savings have been falling and insurance is a critical component of that. Household financial savings as percentage of GDP has fallen from 8.1 per cent in FY20 to 6.5 per cent in FY23, he said and warned that discontinuing incentives on insurance plans should put further pressure on household financial savings to some extent.
Vighnesh Shahane, chief executive of Ageas Federal Life Insurance, said the finance minister has announced that from April income from life insurance policies, other than Ulips, with an aggregate premium amount of ₹5 lakh per annum or more, which was earlier tax-free, will now be taxable. But she said if the insured person dies in between, the death benefit will continue to remain tax-free.
The move is similar to the proposal introduced a couple of years ago which imposed tax on the maturity amount of Ulips if the annual aggregate premium exceeded ₹2.5 lakh, he said.
The proposal is likely to dent the sales of non-par products which have been witnessing strong growth over the last few years, especially during the pandemic. As the cap of ₹5 lakh is applicable for all life policies across insurers, it may deter individuals from purchasing additional policies if they have exhausted their limit with their primary insurer, he explained.
Supriya Rathi, a wholetime director at Anand Rathi Insurance Brokers, opined that the budget has "given bad news for life insurance companies" by limiting the income tax exemption on proceeds of insurance policies.