India’s insurance sector, specifically life insurance firms, got a rude shock from the Budget 2023-24 on February 1. Finance minister Nirmala Sitharaman pushed for Indians to adopt the new income tax regime that does away with exemptions on investments. She also announced curbs on exemptions involving high-value insurance policies.
“(A) proposal…is to limit income tax exemption from proceeds of insurance policies with very high value,” Sitharaman said. From the new fiscal year 2023-24, earnings from insurance policies having an aggregate premium of more than Rs 5 lakh will not be exempt from income tax.
This does not apply to proceeds received on account of the death of the policyholder.
When insurance policies mature, the proceeds including bonuses are exempted from tax provided the premium paid in any year during the term of the policy does not exceed 10 percent of the actual sum assured. This exemption is now limited to those policies that have an aggregate premium of up to Rs 5 lakh.
This would be a blow to life insurers when it comes to high-value policies, especially market-linked policies. The Budget noted that high networth individuals have been taking undue advantage of this exemption.
In these cases, the insurance policies act as investment products and not as a hedge against the risk of life. In the budget last year, the government had already curbed exemptions for unit-linked insurance policies (ULIP) by stating that holders of ULIPs where the premium for any year is in excess of Rs 2,50,000 will not enjoy an exemption from tax on the proceeds.
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This has been further extended to all kinds of insurance policies now. One way this could affect insurer is through large ticket policy sales. Participatory products and savings products may suffer as high value insurance policies now become less appealing.
New tax regime
Yet another blow is the finance minister’s nudge for the adoption of the new income tax regime. The new tax regime has lower tax rates but offers no exemption benefits unlike the old regime. The exemptions on investments under Section 80C of Income Tax Act won’t be available if anyone adopts the new tax regime.
The Budget 2023-24 has proposed several changes and lower tax rates to nudge Indians to adopt the new regime. Sitharaman said that for all purposes the new tax regime would be the default regime for the government though citizens still have the option to stick with the old tax regime that offers a plethora of exemptions.
The bedrock of insurance in India, so far, has been the big support in terms of tax exemptions and life insurers have been able to sell policies aggressively riding on the exemption advantage. This is now progressively expected to reduce. In essence, this makes insurance policies that much harder to sell unless they begin to provide returns that can match that of other financial products. That said, life insurers have been focusing on plan term insurance plans that provide only a cover for life risk rather than pitch insurance products as towards investment goals.
However, the strong growth that the life insurance industry has been enjoying, so far, is in for moderation. That would soon begin to reflect in the valuations of life insurers.
On February 1, life insurance companies' shares dropped sharply. Life Insurance Corporation (LIC) fell 4 percent, SBI Life Insurance was down 7 percent, ICICI Prudential Life Insurance 6 percent, and HDFC Life Insurance was down nearly 9 percent.
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