Nirmala Sitharaman’s Budget 2023 has proposed that maturities of life insurance policies, except ULIPs, with an annual premium of Rs 5 lakh and above taken after April 2023 will now be taxed and this has led brokerages to downgrade life insurance stocks and cut target prices. This was tax free earlier.

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CLSA has cut target prices for life insurance coverage by 25 to 35 percent. It has downgraded HDFC Life to ‘sell’, Max Financials to ‘underperform’, ICICI Pru Life and SBI Life to ‘outperform’ from all ‘buys’ previously.

Jefferies says that the new Budget proposal is negative as it dilutes attraction of top-selling products- non-par and par - versus banks. The brokerage has sought clarity on if the tax applies on proceeds (high impact) or gains (low impact) and if indexation benefit will be available. It believes industry representation and restructuring are recourses but overhang will drag stocks.

It noted that non-participating and participating form 30-60 percent of APE while 10-15 percent are from the greater than Rs 5 lakh bracket.

(A participating or par policy provides the policyholder with profit-sharing benefits and a non-par or non-participating policy does not provide dividend payouts.

APE is the sum of the initial premium on new annual-premium policies, plus one-tenth of premiums on new single-premium policies. In other words, this is the premium basis used to compute life new business value.)

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Morgan Stanley is of the view that the proposals are likely to impact business growth from high net worth individuals in non-par guaranteed return product segment. “These products have been drivers of APE growth and VNB margin expansion in recent years. Hence this is a negative for the sector, see meaningful downside risks to FY24 APE and VNB growth forecasts,” it said.

CLSA also said that this will materially alter growth trajectory of non-PAR business as returns are taxable for large ticket purchases, and unlike ULIPs, the tax rate proposed is the personal income tax rate and not the 10-15 percent capital gains tax.

It noted that non-PAR contributed 35-70 percent of APE and VNB growth over the past three to four years and these changes alter the total addressable market (TAM) of this product.

Also Read: Old vs new tax regime after Budget 2023 — Check which is better for you

It must be noted that the proposal will not affect the tax exemption provided to the amount received on the death of person insured, FM said. "It will also not affect insurance policies issued till March 31, 2023," she said.

HDFC Life's chief executive Vibha Padalkar told PTI that she stares at 10-12 percent hit on the company's top-line with the Budget proposal to tax life products having annual premium of over Rs 5 lakh. 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 percent from 42.74 percent 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.

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 percent in FY20 to 6.5 percent in FY23, he said and warned that discontinuing incentives on insurance plans should put further pressure on household financial savings to some extent.

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First Published:Feb 2, 2023 9:05 AM IST