The changes to tax exemption on life insurance policies announced by Finance Minister Nirmala Sitharaman in her 2023 Budget speech on February 1 are likely to have a 10-12 percent impact on the topline products of HDFC Life and a 5 percent impact on the bottomline products if nothing is done to mitigate the change, predicts Vibha Padalkar, MD and CEO of HDFC Life Insurance.
“At a company level, prima facie, based on what we have seen today, we would have about a 10 to 12 percent impact on our topline in terms of new business," Padalkar told CNBC-TV18 on the 2023 Budget decision to tax insurance policies that have premiums above Rs 5 lakh and its impact on life insurance companies.
"The impact on our bottomline, however, would be a lot less, the reason being that our margins on some of the high-ticket cases are a lot less than the margins on the regular pay long-term policies (high-ticket products have lower margin).”
She pegs the bottomline impact would be about 5 percent, but only if the insurers do absolutely nothing on it, which may not going to be the case.
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Notably, HDFC Life has approximately 35 to 40 percent of its portfolio in savings products. Compared to other players, it has a high share of large-ticket policies. The likes of SBI Life, ICICI Prudential, LIC, for instance, have approximately 20-25 percent of their mix in terms of savings and nearly 10 percent of the savings mix would be large ticket policies.
Asked if the taxation will be on the cumulative of all the premiums paid over the lifetime or the Rs 5 lakh paid in a single financial year, Padalkar said: “It is the cumulative amount. However, the first Rs 5 lakh will get the same tax benefit as it would have been if a person bought a policy that is less than Rs 5 lakh. So, while it is cumulative, it is not that if it’s above Rs 5 lakh, the entire amount is going to get taxed.”
To elucidate further, she said: “Suppose your premium in the first year is Rs 3 lakh, then nothing will happen. Next year, when the premium is Rs 6 lakh, that is when you are crossing the Rs 5 lakh threshold. When this amount - including the renewal premium – is crossed, that is when the income on the incremental amount will get taxed.”
She echoed the finance minister, saying that this move was aimed primarily at high net worth and ultra-high net worth individuals.
Notably, this income will be taxed under the head ‘income from other sources’. The deduction will be allowed only if such a premium had not been claimed as a deduction earlier. The proposed provision shall apply for policies issued on or after April 1, 2023; there will be no change in taxation for policies issued before that date.
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