Tax exemption elimination could cut back life insurers’ pockets share in HNI section

New Delhi: Removal of tax exemptions on all life insurance coverage insurance policies, aside from Ulips, as proposed within the Union Budget for 2023-24, introduced by finance minister Nirmala Sitharaman on Wednesday, has left the insurance coverage sector fearful, given its penalties on the enterprise.

As per the finances announcement, revenue earned from all life insurance coverage insurance policies, excluding unit-linked insurance policy (Ulips), with a premium of above ₹5 lakh will likely be taxable.This is relevant for brand spanking new insurance policies, issued after 1 April, and never for the prevailing ones.

According to an insurance coverage report – ‘A taxing change’ issued by Kotak Institutional Equities, “The elimination of the tax exemption on revenue from high-ticket conventional insurance coverage insurance policies will cut back insurance coverage pockets share within the HNI section. As per administration, such insurance policies contribute 10-12% of HDFC Life’s topline. We anticipate the ratio to be related throughout most massive gamers.”

However, experts are awaiting granular industry data on the share of traditional policies over ₹5 lakh.

Amit Ganatra, Partner – Tax & Regulatory Services, BDO India, said, “As per the data available in the public domain, insurance companies generally have approximately 8-10% of their clientele as HNIs. The exemption withdrawal is likely to impact 10-15% on the top line with lower impact on profitability as premium on policies already taken by HNIs shall continue.”

Currently, the maturity quantity acquired from the life insurance coverage coverage is tax exempt when the premium is lower than 10% of the sum assured. However, the federal government has mentioned that welfare goal of insuring the people‘ life was misused, and huge sums have been acquired by excessive web price people (HNIs). Therefore, to curb the misuse, if the combination annual premium paid on life insurance coverage insurance policies goes past ₹5 lakh, the proceeds will not be exempted below the Act.

Aarti Raote, Partner, Deloitte India, “As per Finance Act 2021, tax exemption was restricted to Unit Linked Insurance Policies (ULIP) issued on or after 1 February 2021, the place the combination quantity of premium (in case of a couple of ULIP) doesn’t exceed ₹2.5 lakh. The authorities sought to carry the insurance coverage insurance policies additionally at par with ULIP. Hence, the finances 2023 proposes that tax exemption can be accessible on Life Insurance insurance policies issued on or after 1 April 2023 (aside from ULIPs) provided that the combination quantity of premium (in case of a couple of coverage) paid doesn’t exceed ₹5 lakh.”

Market consultants counsel that after the elimination of taxation on ULIPs over ₹2.5 lakh, contribution of high-ticket ULIPs was diminished. The tax exemption on insurance coverage has been a powerful gross sales function and units insurance coverage other than the remainder.

“We anticipate a decrease HNI pockets share for insurance coverage firms below the brand new regime whilst they decrease the affect. We imagine that insurers‘ modern product designs, which faucet into diversified buyer profiles and funding objectives, have helped the business maintain its general progress momentum. With most massive gamers providing multi-product bouquets, insurance coverage firms have been agile in toggle throughout merchandise to bypass slowdown in any particular section. For occasion, the business shifted focus to safety from ULIP in pursuit of profitability and additional to non-par from safety when the latter confronted headwinds,” as per the report.

“SBI Life, given its focus on SBI’s customers with lower tickets, may be an exception. Even ICICI Prudential Life has promoted its non-par product with agency and other (non-ICICI) banks; as such, the ratio for high ticket policies for ICICI Prudential Life may be somewhat lower. We find bringing traditional insurance policies under the tax net as directionally negative for the sector. While the ratio of high-ticket policies (above ₹5 lakh) is currently low, the average for non-par may be about ₹1-2 lakh. We expect ticket sizes to increase over time, even as we do not expect the exemption limit to increase at a similar pace,” the report added.

Ganatra mentioned, “The life insurance coverage firms are prone to make their conventional merchandise extra engaging to overshadow the exemption withdrawal. Traditional plans typically provide a set price of return to HNIs over an extended tenure. Though withdrawal of exemption shall affect funding in life insurance coverage insurance policies, contemplating the mounted return on such insurance policies in comparison with different devices, there shall not be any substantial affect on the profitability.”

Notably, revenue from annuities and single-premium insurance policies typically will get taxed. Income on ULIPs above the annual premium of ₹2.5 lakh has additionally been taxed for the final two years.

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