BackTax exemption removal may reduce life insurers’ wallet share in HNI segment
Notably, income from annuities and single-premium policies generally gets taxed. Income on ULIPs above the annual premium of ₹2.5 lakh has also been taxed for the last two years.
PremiumNew Delhi: Removal of tax exemptions on all life insurance policies, other than Ulips, as proposed in the Union Budget for 2023-24, presented by finance minister Nirmala Sitharaman on Wednesday, has left the insurance sector worried, given its consequences on the business.
As per the budget announcement, income earned from all life insurance policies, excluding unit-linked insurance plans (Ulips), with a premium of above ₹5 lakh will be taxable.This is applicable for new policies, issued after 1 April, and not for the existing ones.
According to an insurance report - ‘A taxing change’ issued by Kotak Institutional Equities, “The removal of the tax exemption on income from high-ticket traditional insurance policies will reduce insurance wallet share in the HNI segment. As per management, such policies contribute 10-12% of HDFC Life’s topline. We expect the ratio to be similar across most large players."
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 amount received from the life insurance policy is tax exempt when the premium is less than 10% of the sum assured. However, the government has said that welfare objective of insuring the individuals‘ life was misused, and large sums were received by high net worth individuals (HNIs). Therefore, to curb the misuse, if the aggregate annual premium paid on life insurance policies goes beyond ₹5 lakh, the proceeds will no longer be exempted under 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, where the aggregate amount of premium (in case of more than one ULIP) does not exceed ₹2.5 lakh. The government sought to bring the insurance policies also at par with ULIP. Hence, the budget 2023 proposes that tax exemption would be available on Life Insurance policies issued on or after 1 April 2023 (other than ULIPs) only if the aggregate amount of premium (in case of more than one policy) paid does not exceed ₹5 lakh."
Market experts suggest that after the removal of taxation on ULIPs over ₹2.5 lakh, contribution of high-ticket ULIPs was reduced. The tax exemption on insurance has been a strong sales feature and sets insurance apart from the rest.
“We expect a lower HNI wallet share for insurance companies under the new regime even as they minimize the impact. We believe that insurers‘ innovative product designs, which tap into diversified customer profiles and investment goals, have helped the industry sustain its overall growth momentum. With most large players offering multi-product bouquets, insurance companies have been agile in toggle across products to circumvent slowdown in any specific segment. For instance, the industry shifted focus to protection from ULIP in pursuit of profitability and further to non-par from protection when the latter faced 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 said, “The life insurance companies are likely to make their traditional products more attractive to overshadow the exemption withdrawal. Traditional plans generally offer a fixed rate of return to HNIs over a longer tenure. Though withdrawal of exemption shall impact investment in life insurance policies, considering the fixed return on such policies compared to other instruments, there shall not be any substantial impact on the profitability."
Notably, income from annuities and single-premium policies generally gets taxed. Income on ULIPs above the annual premium of ₹2.5 lakh has also been taxed for the last two years.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
