 | « Back to article | Print this article |
'The incentives to switch to the new tax regime... are viewed as a negative due to potential loss of customers who buy policies for saving tax.'
'The tax-saving value proposition for the sector reduces.'
A slew of announcements for the insurance sector sent stocks in this space into a tailspin on Budget Day. Life insurance stocks dropped in intraday trade on Saturday before recouping some losses as more clarity emerged on the Budget announcements.
Experts attributed the sharp intraday fall to confusion around changes in taxation of Unit Linked Insurance Plans (Ulips).
Additionally, the growing attractiveness of the new tax regime, which offers significant benefits to taxpayers, was seen as a factor diverting flows away from insurance products.
"Insurance stocks dropped mainly due to a misunderstanding that gains from Ulips will no longer be tax-free.
"In reality, the change in taxation only impacts policies having a ticket size of over Rs 2.5 lakh, and is a positive for investors," said a senior insurance official.
According to experts, all Ulips with over Rs 2.5 lakh ticket size will qualify for capital gains taxation from April 1, 2026. At present, gains from some policies are taxed at the investor's slab rate.
"According to the current provisions, if the premiums are more than Rs 2.5 lakh, those Ulips are considered as capital assets. However, the same was not applicable to Ulips with premiums exceeding 10 per cent of capital sum assured," explained Kinjal Bhuta, secretary, Bombay Chartered Accountants' Society.
"Now, to bring parity, all those Ulips that do not meet any of the conditions of Section 10 (10D) for exemption, shall be considered as capital assets," explained Bhuta.
According to industry officials, the change is positive for Ulip investors.
"This has been done to bring clarity on tax on redemption of Ulips. Ulips to which exemption under Section 10 (10D) does not apply, will now attract capital gains tax, instead of being taxed at the slab rate according to the applicable income slab," confirmed Mahesh Balasubramanian, managing director, Kotak Life Insurance.
"This is a positive development as the taxation on such policies is being rationalised," Balasubramanian added.
While changes to the Ulip tax structure is seen as positive, the growing attractiveness of the new tax regime could hit the industry.
In the Budget, the government has proposed 'nil' taxes under the new tax regime for people earning up to Rs 12 lakh (excluding income subjected to special rate such as capital gains) while also rationalising tax brackets.
The tax slabs in the old tax regime remain unchanged. Unlike the old tax regime, the new structure offers no incentives to investors to buy insurance policies.
"Additionally, the incentives to switch to the new tax regime... are viewed as a negative due to potential loss of customers who buy policies for saving tax. The tax-saving value proposition for the sector reduces," said an analyst.
"That said, for certain companies, the impact could be marginal as customers with low income, who would benefit from the new tax regime, anyway are purchasing insurance products," the analyst added.
While the Budget has no direct impact on the mutual fund business, the cut in income-tax is expected to boost inflows into various investment products, including MF schemes.
"The introduction of new income tax slabs is set to increase disposable income, encouraging higher savings and investments among individuals. These initiatives collectively position the MF industry for expansion, ensuring greater participation and investment opportunities for retail and institutional investors alike," said Venkat Chalasani, chief executive, Association of Mutual Funds in India (Amfi).
Experts also see the growing attractiveness of the new tax regime diverting some of the investments from tax-saving options like insurance to MFs.