Shares of most life insurance companies have come under pressure after the Budget 2023 announcements regarding limiting income tax exemption from the proceeds of insurance policies.
In the Budget, Finance Minister Nirmala Sitharaman announced that income earned from all life insurance policies, excluding unit-linked insurance plans (ULIPs), with a premium of above ₹5 lakh will be taxable. This is applicable for new policies, issued post-April 1, and not for the existing ones.
The ULIP policies have already got a limit of ₹2.5lakh in the FY22 Budget.
In simple terms, if you have a life insurance policy (not a ULIP plan) with a premium of more than ₹5 lakh, you will pay taxes on its proceeds. However, it will not apply to proceeds received on account of the death of the policyholder.
Another blow to the insurance sector is the tweaks in the new income-tax regime which can reduce the tax-saving value of tax-saving instruments (such as life insurance policies) under Sections 80C, 80D, etc.
The insurance industry looks worried about these budgetary proposals.
As per PTI, HDFC Life's chief executive Vibha Padalkar told that she stares at a 10-12 percent hit on the company's top-line with the Budget proposal to tax life insurance products having an 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.
Analysts and brokerage firms point out that the Budget dealt a blow to the life insurance sector as it has the potential to push individuals to shift to the new tax regime, which does not favour tax exemptions from investments in insurance schemes.
Also, they added that the Budget move is likely to be a negative for saving products which are usually high in value and margins.
Cyril Charly, Research analyst at Geojit Financial Services said the Union Budget took away the tax-free advantage of high-value traditional insurance policies, making them less attractive for investments.
Charly added that the proposals of taxing life insurance products and tweaks in the new tax regime have come as a big blow to the sector, which had hoped for positive measures from the government to improve its penetration. This has caused investors to reconsider the sector's growth prospects, forcing them to stay side-lined.
Brokerage firm Kotak Institutional Equities believes that the removal of the tax exemption on income from high-ticket traditional insurance policies will reduce insurance’s wallet share in the HNI segment.
Kotak added that the insurance industry’s innovation in product design has been impressive in minimizing the near-term impact. However, a tax net over insurance income will directionally temper long-term industry growth.
"We find bringing traditional insurance policies under tax net as directionally negative for the sector. While the ratio of high-ticket policies (above ₹5 lakh) is currently low, the average for non-par may be about ₹1-2 lakh. We expect ticket sizes to increase over time, even as we do not expect the exemption limit to increase at a similar pace," said Kotak.
Brokerage firm Global Financial Services underscored the changes in the new tax regime will reduce the tax-saving value of tax-saving instruments (under Sections 80C, 80D, etc.) which will have a material impact on the life insurance sector.
"The two alterations (change in the new tax regime and taxing life insurance gains) will have a material impact, with Sec80C/D-related changes hurting growth in the masses segment and the removal of exemptions U/S10(10D) hitting growth of high-ticket non-ULIPs in the affluent segment as well as margins (if players choose to sacrifice margins for keeping the product competitive). Accounting for the changes, we reduce our estimates and longer-term assumptions for life and health insurance companies," said Emkay.
Shares of Max Financial Services, HDFC Life Insurance Company, Life Insurance Corporation of India and SBI Life Insurance Company traded in the red in the afternoon session on BSE on February 2.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.