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Insurance industry executives, as a part of a Confederation of Indian Industries (CII) representation, met the finance minister on Tuesday to seek relaxation on the budget announcement of taxing income from high value life insurance policies.
The life insurance industry has sought an increase in the threshold of premiums beyond which the income from these policies are taxed to Rs 10 lakh per year from the current Rs 5 lakh.
Further, they are also asking the government to tax the gains on such policies as debt mutual funds instead of taxing them at the marginal tax rate.
The life insurance industry last week was rocked by the government’s proposal in the Union Budget to tax high-value policies with premium aggregating to Rs 500,000 per year. The rationale behind this move of the government is to plug the arbitrage which high net worth individuals are using to get tax free returns on their high value insurance policies through Section 10(10D).
Since then, the finance ministry officials have clarified that the proposal is not targeting pure insurance products. Instead, it is targeting investments made in the garb of insurance. “We have evidence that this is becoming a tax avoidance device, whereby people are using the clothing of insurance to obtain high tax-free incomes,” T V Somanathan, Finance Secretary, Ministry of Finance had said in a post budget interaction with the media. The officials also suggested that the move by the government is unlikely to impact the penetration of insurance in the country.
However, analysts and insurance industry insiders differ on this view presented by the finance ministry officials. They reckon the decision is expected to hit the top line and margins of life insurers, going forward. But in the short term, they will see higher sales of such policies because the proposal becomes effective from April 1, 2023.
According to disclosures, ICICI Prudential Life Insurance’s share of business of non-unit linked policies with annual premium of above Rs 5 lakh is about six per cent of the total annualised premium equivalent (APE) for 9M-FY2023. For Max Life, this ratio stands at 9 per cent, and for HDFC Life it is over 10 per cent. However, the impact for SBI Life could be as low as 1 per cent.
“We find bringing traditional insurance policies under tax net as directionally negative for the sector. While the ratio of high-ticket policies (above Rs 5 lakh) is currently low, the average for non-par may be about Rs 1,00,000–2,00,000,” Kotak Institutional Equities had said in its report.
According to Macquarie Research, for HDFC Life, assuming they do not tweak the products or the sales process, the impact is 10-12 per cent on APE, and 5 per cent on value of new business (VNB). However, this assessment doesn’t include the likelihood of their policyholders breaching the Rs 5 lakh limit as they could be having policies with other life insurers.
“The VNB impact is lower because some of these high-ticket policy variants actually have lower margins due to the shorter tenure of the products. Also, there are some par products that inherently have much lower margins than company reported margins of 26-27 per cent,” the report said.
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