Budget and Life Insurance

2 Feb 2023 , 01:23 PM

• Negative: For non-ULIP policies with aggregate premiums of above 500k p.a., redemption proceeds will become taxable at the marginal tax rate: Negative for Life Insurance companies with higher share of high-ticket non-ULIP business. The taxation is applicable on an aggregate premium basis for an individual and for the incremental amount exceeding 500k only. With this, both traditional and ULIP savings products are now taxable, if the annual aggregate premiums exceed Rs500k/250k respectively. However, we believe the impact from this change could have an impact of up to 10% on the overall APE/VNB of the companies, with varying degrees, depending on the share of business coming from the high-ticket non-ULIP segment. SBI Life is best positioned and the least impacted, in our view.
• Mildly negative: Increased tax benefits provided for the new tax regime for personal income tax rates, which proposes lower tax rates in lieu of most of the deductions and exemptions available currently, including under section 80C related to investments in certain product classes such as insurance, ELSS, PF, PPF etc. The new tax regime is optional, but if adopted by majority of tax payers, may result in lower inflows for insurance savings products too under 80C. We believe that despite the additional tax benefits under the new regime, it still remains less attractive vs the old regime. Hence, it could be only marginally negative for Life Insurance companies. However, where insurance premiums are lower than 500k/250k for non-linked/linked products, it still remains tax free at the time of withdrawal/maturity compared to other investment classes such as equity, debt, real estate or commodities.

Analysts of IIFL Capital Services believe negative impact of the budget announcements on the Life Insurance sector.