A raw deal for life insurance sector

The Budget appears to have dealt a double blow to the life insurance sector via a couple of crucial changes on the personal income-tax front. Nudge towards 'New Tax Regime' is set to hit lower-ticket life/health policy sales. This explains why scrips of life insurers are bleeding on bourses.

By tweaking the 'New Tax Regime', the government has attempted to make it attractive while bringing down taxes under this 'exemption-free' regime, thus reducing the tax-saving value of tax-saving instruments like life insurance policies under Sections 80C and 80D. And by removing exemptions under Sec10(10D) of the Income Tax Act, the Budget has also proposed taxing the maturity and surrender amount of non-ULIP policies, if the total premium paid by an individual under such polices is more than Rs 5 lakh in a year.

ULIP policies already have a limit of Rs 2.5 lakh in the FY22 Budget. On net, the two alterations 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 and margins.

Accounting for the changes, Emkay has reduced its estimates and longer-term assumptions for life/health insurance companies. Exemptions under Section 10(10D) allowed the life insurance maturity and surrender proceeds to be tax-free, if the sum assured of such policies was more than 10 per cent of annualized premiums. This taxation advantage made up for the illiquidity aspect of life insurance products, thus making it an attractive product for the higher tax-bracket affluent class. However, with the new annual-premium limit of Rs five lakh across non-ULIP policies, for the maturity and surrender proceeds to remain tax-free, effectively puts a ceiling of Rs five lakh annual premium for an individual, as far as attractiveness of such a product is concerned.

ULIPs already have a limit of Rs 2.5 lakh for the maturity and surrender proceeds to be tax-free. However, any ULIP above this limit is taxed as per the capital-gains taxation provision and, hence, entails a lower tax rate in case of Equity-oriented ULIP and benefit of indexation in case of debt-oriented ULIP. This becomes complicated in case of the proposal for non-ULIP policies, where gains are to be taxed at a marginal tax rate by clubbing in 'income from other sources'. Nevertheless, LIC's dependence on 80C exemption-induced sales is likely to remain high. Also, private life insurers have a positive relation with such exemption-driven investments, which also reflects in Q4 of a fiscal, as it is a seasonally-heavy quarter.

With the proposed changes in the 'New tax Regime', the effective tax benefits provided to an individual by these tax-saving instruments under the 'Old Tax regime' reduce considerably. Moreover, return of focus on the 'New Tax Regime' clearly indicates the government's wish to eventually move towards an exemption-free personal taxation regime. Time, the industry made a representation to the finance ministry, putting forward its point.