Union Budget 2023: Insurance companies in focus for the wrong reason

Know what impacted insurance stocks post-new tax regime.

One of the worst-hit sectors post-Union Budget 2023 is Insurance. Most of the stocks are down in the lower double digits. There are a couple of reasons for such price action. First, there was an expectation that GST imposed on insurance premiums should be done away with in this budget. Finance Minister had other plans and no such relaxation was given.

The FM Nirmala Sitharaman presented the union budget for 2023-24, the budget involved changes in the tax slabs for the new tax regime. For people earning Rs 0 to 3 lakh the tax rate is 0%, for people earning Rs 3 – 6 lakh the rate is 5%, for people earning Rs 6 – 9 lakh the rate is 10%, for people earning Rs 9 – 12 lakhs the rate is 15%, for people earning Rs 12 – 15 lakh the rate is 20% and, for people earning more than Rs 15 lakh the rate is 30%. The new tax regime would become default henceforth, however, the assessee has the option to select the old tax regime. Also, the income-tax rebate limit increased from Rs 5 lakh to Rs 7 lakh under the new tax regime. However, the new tax regime would not have any income tax deductions that were available in the old tax regime.

The old tax regimes allowed taxpayers to get tax deductions under sections 80C, 80D and 80G. As a result, most taxpayers opted for insurance to get the income tax deduction under section 80C and Section 80D. However, the new tax regime would not allow any sort of deduction on opting for insurance.

This might impact the revenue from the insurance premium for most insurance companies. Also, when insurance policies mature, the proceeds, including bonuses, are tax-free if the premium paid during the policy's duration does not exceed 10% of the actual sum assured. This exemption is now restricted to insurance with a total premium of up to Rs 5 lakh.

When it comes to high-value insurance, particularly market-linked policies, this would be a setback for life insurers. According to the Budget, high-net-worth individuals have been exploiting this exemption.

Insurance stocks that had the most impact in today’s session were General Insurance Corporation of India (down 12%), ICICI Prudential Life Insurance Company Ltd (down 11.32%), and HDFC Life Insurance Company Ltd (down 10.95%).

India, which is already underpenetrated when it comes to individuals taking insurance policies had support from tax deductions one gets on the premium paid on an insurance policy. India as penetration of life insurance in the country stood at 3.20% in 2020-21, and just 1 per cent for the non-life segment. This will have an adverse impact on entire insurance companies.