Insurance penetration in India is extremely low due to a lack of awareness, socio-cultural barriers, education, and limited reach. However, the Economic Survey noted that insurance penetration in India steadily increased from 2.7% to 4.2% in 2020 and 2021. This growth is nearly twice that of emerging markets and also, to some extent, above the global average! This is a good sign for India’s growth and that of the insurance sector.
While the government is making continued efforts to increase insurance penetration in India, Budget 23-24 left a bitter taste in the mouth of the insurance sector. The new rule that proposed to tax the maturity proceeds of high-value life insurance policies, is likely to have a negative impact on the insurance industry in India.
Let’s read more about the rule and its impact on the insurance sector.
The impact of tax benefits removal on high-value insurance policies
Throwing the insurance industry in a fix, Finance Minister Nirmala Sitharaman, in her Budget 23-24, announced certain tax changes on insurance policies. One of the significant changes is that the income from high-value insurance policies with a premium over Rs. 5 lakh will not be exempt from taxes. But, the rule shall not impact ULIP policies, and if income is received upon the insured’s death, it shall remain tax-exempt. Also, the changes shall not affect insurance policies issued before March 31, 2023.
Previously, buyers could claim tax exemption on income from such policies, but the new rule removes this exemption for high-value policies.
The decision to tax high-value life insurance purchases follows similar moves made in the previous budget. In 2021, Sitharaman removed tax exemption for maturity proceeds of ULIPs where the annual premium exceeded Rs 2.5 lakhs.
These actions suggest that the government is looking to cap tax exemptions available to the public. However, exemptions for maturity proceeds under section 10(10D) are still available for policies where the premium paid is less than 10% of the sum assured.
Now, insurance policies in India are marketed highly for tax benefits. If this benefit is negatively impacted, the industry could see a plum in insurance buyers, indirectly benefiting other investment avenues like mutual funds, etc. Naturally, the insurance sector did not react well to the bitter surprise.
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Impact on share prices of leading insurance providers and the industry
The removal of tax benefits had a noticeable effect on the share prices of top insurance companies in India, including ICICI Prudential Life Insurance and HDFC Life Insurance, with their share prices decreasing by 4% and 11%, respectively, following the announcement. The largest insurer in the country, LIC, saw its share price crash by 8.38%, while the SBI life insurance stock declined by 9.31%.
The move is also predicted to impact the profitability and margins of the insurance sector. While the Insurance Regulatory and Development Authority of India (IRDAI) has been working to promote insurance for all, this budget proposal could be a significant setback for this mission. ULIP amendment introduced in Budget 2021 had already posed challenges for the life insurance industry, and these new proposals may have a further impact.
The removal of tax benefits on high-value insurance policies in India is expected to significantly impact the insurance companies in India. Consumer preferences will likely shift towards pure risk covers like term insurance plans and investment-oriented ULIPs. The insurance sector plays a crucial role in the overall economic growth of the country and makes substantial investments in the infrastructure sector, equity markets, and corporate and government bonds, and generates significant employment opportunities. Reevaluating some of the proposals in the budget could help stabilise and further the already under-penetrated life insurance market in India.