Some budgetary announcements is negative for life insurance companies– as it will impact savings products which are usually high value and margin products (though not protection). However, smaller policies remain unaffected. Overall a negative for life insurance companies as it will impact the high value premium policies — thus impacting overall industry GWP growth.

share prices of life insurance companies fall


Insurance policies where the premium is over Rs 5 lakh will no longer be tax exempt, as per the provisions in the Union Budget 2023-24.

“It is proposed to provide that where aggregate of premium for life insurance policies (other than ULIP) issued on or after 1st April, 2023 is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt,” according to the provisions in the Union Budget for the next fiscal year that starts April 1.

This will not affect the tax exemption provided to the amount received on the death of person insured. It will also not affect insurance policies issued till 31st March, 2023, the provision added.

This move is similar to the proposal introduced by the government a couple of years ago which imposed tax on the maturity amount of ULIPs if the aggregate premium exceeded Rs. 2.5 lakh p.a.

Leading private life insurer HDFC Life’s chief executive Vibha Padalkar said that she stares at 10-12 per cent hit on the company’s top-line with the Budget proposal to tax life products having annual premium of over Rs 5 lakh.

The insurer bottomline also is likely to be affected by 5%, she added. .

She also fears that the increased tax exemption bracket of Rs 7 lakh and the steep reduction in the maximum surcharge on the affluent to 39 per cent from 42.74 per cent earlier may nudge them to spend more and save less. This can have many cascading impacts on the macro sector by way of a spike in the already high inflation, apart from the life insurance sector which has been facing sales issues since the Covid pandemic as people were not investing in long-term savings. And since the opening up of economic activities, many are on a ”revenge spending mode” and not investing in financial products even now.

Given the overall increase in incomes, the government should have either ignored the new tax levy on insurance products or it should have imposed tax on products with premium of Rs 10 lakh or upwards. At this level, it will definitely hit the industry hard, she added.

The industry was expecting a proposal to offer composite lincence for the insurance sector wherein life insurers would be allowed to renter the health business which they were doing till 2015. Besides, the insurance sector players were also expecting some positive moves on the annuity products front.

Tarun Chugh, chief executive of Bajaj Allianz Life, said the tax proposal on higher value non-Ulip or traditional life policies ”is bit of a dampener for the insurance industry and for increasing penetration of insurance and household financial savings.” ”We as a market still have quite low insurance penetration and there is a need to provide measures and incentives to boost that in the coming years. Also, household financial savings have been falling and insurance is a critical component of that. Household financial savings as percentage of GDP has fallen from 8.1 per cent in FY20 to 6.5 per cent in FY23, he said and warned that discontinuing incentives on insurance plans should put further pressure on household financial savings to some extent.

“In today’s Union Budget, the government has announced that from April 1st onwards, income from life insurance policies (other than ULIPs), with an aggregate premium amount of Rs. 5 lakh p.a. or more, which was earlier tax-free will now be taxable. This proposal is likely to dent the sales of non-par products which has been witnessing strong growth over the last few years, especially during the pandemic. As the cap of Rs. 5 lakhs 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 & CEO, Ageas Federal Life Insurance.

Siddarth Mohanty, managing director, LIC said the move to tax policies for which more than Rs 5 lakh of aggregate premium is paid will not affect the corporation.

Following the announcement in the Budget Speech, shares of ICICI Prudential Life Insurance Company dropped 10.97 per cent to close at Rs 402.55 on the BSE.

HDFC Life Insurance Company Ltd fell 10.96 per cent, Max Financial Services Ltd (9.45 per cent), SBI Life Insurance Company Ltd (9.31 per cent) and Life Insurance Corporation of India (8.38 per cent).

Life insurance stocks witnessed significant selling-on-demand concerns as the budget proposals made life insurance schemes less appealing as a tax-saving instrument, said Cyril Charly, Research analyst at Geojit Financial Services.

Arihant Bardia, CIO and Co Founder said this is negative for life insurance — as it will impact savings products which are usually high value and margin products (though not protection). However, smaller policies remain unaffected. Overall a negative for life insurance companies as it will impact the high value premium policies — thus impacting overall industry GWP growth.

Bardia said if premium paid on insurance policies (excl. ULIP) exceeds Rs 5 lakh in a year, then the proceeds from those policies will be taxable (except in case of death benefit).

A similar provision was already introduced for ULIPs in 2021 wherein the aggregate premium was restricted to Rs 2.5 lakh in a year for tax exempt proceeds”, said Bardia.

Supriya Rathi, a wholetime director at Anand Rathi Insurance Brokers, opined that the budget has ”given bad news for life insurance companies” by limiting the income tax exemption on proceeds of insurance policies.

However,improvements in ease of doing business specifically, the changes pertaining to simplification of the KYC process, one stop solution for identity and address updating, common business identifier, unified filing, and entity digilocker will make placement of insurances easier. Claims payment would also be facilitated, said analysts..

Changes in personal income tax will increase personal disposable income. This will result in individuals ability to buy better, higher value insurances to manage their risk, they said.