Th Budget was lauded as being holistic by many, but it turned out to a double-whammy for life insurance companies due to announcements pertaining to the cap on high-value policies and shift to the new income tax regime.

Against insurers’ expectation of additional tax sops or exemptions for insurance policies, the sector has been faced with dual negative news, which industry participants believe is a step back in the journey towards growing insurance penetration in the country.

The Budget has proposed to limit tax exemption from proceeds of insurance policies with very high value. Effective April 2023, aggregate premium from policies, other than ULIPs — of over ₹5 lakh — will be taxable under ‘Income from Other Sources’.

The move is similar to the proposal introduced by the government two years ago, which imposed tax on the maturity amount of ULIPs if the aggregate premium exceeded ₹2.5 lakh per annum. 

“This proposal is likely to dent the sales of non-participating 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 insurance policies across insurers, it may deter individuals from purchasing additional policies if they have exhausted their limit with their primary insurer,” said Vighnesh Shahane, MD and CEO of Ageas Federal Life Insurance.

HDFC Life’s Vibha Padalkar told a television channel that the move is targeted towards HNIs and ultra HNIs, adding that it could result in a 10-12 per cent hit on the topline in terms of new business APE, but the impact on the bottomline would be lower at around 5 per cent due to lower margins on high-tickets products.

The other major announcement pertained to making the new income tax regime as ‘default’. This is expected to discourage investment-led insurance purchases in the absence of tax dispensations and higher income tax slabs.

“We could see the life insurance market affected because of this. Overall, the life and health insurance industries could see a drop as more people are denied tax exemptions for their premiums, which is a major sales driver for those markets,” said Avinash Ramachandran, COO of Assurekit

Tax benefits

The insurance sector is headed in the direction where it will no longer be eligible for any tax benefits, such as deductions under 80C and health insurance, said Rakesh Goyal, MD of Probus Insurance Brokers.

Stocks of life insurance companies, such as ICICI Prudential Life Insurance, SBI Life Insurance, HDFC Life Insurance and Life Insurance Corporation, ended 8.0-11.5 per cent lower on the bourses.

The insurance sector was expecting a special carve out for insurance under Section 80(C) of the Income Tax Act, additional deductions for health insurance premiums, increase in FDI to 100 per cent, and reduction in tax rate for foreign reinsurance branches.