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    Double whammy! Tax exemption reversal makes life insurance cos run for cover

    Synopsis

    Shares of life insurance companies fell sharply in trade on Wednesday following the announcements and extended the losses on Thursday. Shares of SBI Life Insurance, Life Insurance Corporation of India (LIC), Max Financial Services, and HDFC Life Insurance Co declined 0.5-6%.

    Double whammy! Tax exemption reversal makes life insurance cos run for coverGetty Images
    The announcements regarding the new tax regime and the removal of exemptions on certain tax-saving life insurance policies in the Union Budget on Wednesday left the insurance sector crying foul, given its repercussions on the business.

    The government on Wednesday decided to tax the proceeds from life insurance policies, excluding unit-linked insurance plans (ULIPs) if the total premium paid is over Rs 5 lakh from April.

    Further, to encourage people to move to the new tax regime, the government reduced taxes under the ‘exemption-free’ regime, thus reducing the tax-saving value of tax-saving instruments, such as life insurance policies.

    Shares of life insurance companies fell sharply in trade on Wednesday following the announcements and extended the losses on Thursday. Shares of SBI Life Insurance, Life Insurance Corporation of India (LIC), Max Financial Services, and HDFC Life Insurance Co declined 0.5-6%.

    While exemptions under the new tax regime could hurt growth in the masses segment, taxing the non-ULIP plans will hit sales of high-ticket products as well as margins, said analysts.

    The new proposal will affect non-ULIP savings segments like the most popular non-par savings for private insurers, and par-savings for companies like LIC and HDFC Life Insurance, brokerage Jefferies India pointed out.

    Non-Par and Par savings segments drive 30-60% of annual premium equivalent (APE) and 30-65% of the value of the new business (VNB) for life insurance companies, Jefferies said.

    The exemptions earlier allowed the life insurance maturity and surrender proceeds to be tax-free if the sum assured of such policies was more than 10 times the annualized premiums. This made the products attractive to the higher tax-bracket affluent class.

    However, taxing those with an annual premium limit of over Rs 5 lakh reduces the attractiveness of such a product, explained Emkay Global Financial Services.

    Following these announcements, the brokerage reduced its earnings estimates and long-term assumptions for life and health insurance providers.

    Analysts do expect the industry to make representations to the government seeking clarity on the changes, specifically whether the entire proceeds will be taxed or only the gains on these instruments.

    “If the entire proceeds are taxed, it will be a big negative as it will involve taxing the principal as well, but if only gains/returns are taxed, then the impact should be manageable,” said Jefferies.

    Some positive news
    While there were two major negative announcements in the Budget, there were a few positives too, for the sector such as simplifying the KYC process and building digital public infrastructure for agriculture.

    “Announcement to build a digital public infrastructure for agriculture as an open source will also help insurance companies serve farmers better through seamless information on crop insurance,” said Parimal Heda, chief investment officer, Go Digit General Insurance.

    Further, tax exemptions given by the government to boost manufacturing and adoption of electric vehicles are also seen indirectly benefiting the insurance sector.

    This will help in boosting the EV insurance business of companies, Heda added.

    (Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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