Finance Minister Nirmala Sitharaman on Saturday delivered the longest budget speech lasting two and a half hours. What got a fair bit of attention in the Finance Minister’s budget speech was the new Personal Income Tax regime. The new regime looks like this,
The cut in the Personal Income Tax wasn’t a simple give away and came with a twist. An individual who opts for the new personal tax regime would not be able to claim a total of 70 Income Tax exemptions out of the total of a little over 100 exemptions.
Salaried taxpayers who opt for the new regime will have to forgo the standard deduction as well as exemptions under chapter VI-A which includes HRA, investments under 80C, 80D and even LTA.
Tax exemption of up to Rs 1.5 lakh under 80C includes your life insurance policy and Public Provident Fund (PPF). Exemptions under Section 80D includes your medical insurance policy.
The FM also said that in the long run “we would be ending all the exemptions.”
No exemptions under the new tax slabs along with the statement that all exemptions would be ended eventually spells trouble for insurance companies. As Max Life told CNBC-TV18 in an interview, 95 percent of all life insurance policies in India are sold as savings products when measured by value. Also, 2/3rd of life policies in India (by a number of policies) are sold as savings products.
On Saturday (when the budget was announced), stocks of the listed companies, Max Financial Services, ICICI Prudential Life Insurance & SBI Life Insurance fell in the range of 10-14 percent while HDFC Life Insurance fell as much as 6 percent.
FM’s reassurance in the press conference after presenting the Budget, that the new tax slabs will discourage savings and hence there will be more money with people to consume and save, did not cut ice with investors.
Companies have also gone all out to reassure investors. Vibha Padalkar, MD & CEO at HDFC Life in an interview with CNBC-TV18 admitted that there would be some negative impact of the new tax regime on the insurance business but it won’t be material for a company like HDFC Life Insurance. Supporting her optimistic claim, Padalkar further added ‘the fourth quarter has been growing at around 35 percent as compared to highs of 44 percent which was about 4 years ago. The share of tax-saving insurance products has been steadily going down. So the impact of the new tax regime will start fizzling out at least for senior companies like HDFC Life Insurance’
When asked whether the guidance from the government that all exemptions would eventually be phased out, Max Life’s CEO, Prashant Tripathi admitted that “If you were to look at an average customer of life insurance and look at the older tax regime, there were series of deductions and exemptions which were making it meaningful in terms of tax advantage. If one were to make a complete transition to the new regime of a lower tax rate, most people will be better off being on the old tax regime.”
Brokerage analysts who track the sector have also weighed in, Motilal Oswal in its note said that with all exemptions going out, they expect some moderation in the sales of savings products.
Nomura believes that the budget is quite negative for insurance companies. Removal of DDT will impact VNB margins and embedded value for life insurance companies. Also, the removal of IT deductions will reduce the effectiveness of savings products.
An analysis of the new and the old tax regime shows that for an individual who is availing exemptions under the Income Tax Act, the tax liability is lower in the old regime as against the new regime and hence there would not be a significant shift. With respect to the question of whether or not the new tax regime will be beneficial for policyholders, Padalkar said ‘many analysts have realised that moving to the new tax regime is not going to be beneficial. A taxpayer would get about 200-250 bps advantage if he sticks with the old tax regime’.
But what about millennials who do not have life insurance or a medical insurance policy. The new tax regime would be better and more efficient for them. Analysts believe that though the new tax regime initially may be better for millennials but that would be for a very temporary and short period of time. The old tax regime would soon start becoming better for the millennial section as they start becoming a part of the financial system.
The biggest overhang though still remains the government’s intention to weed out all exemptions gradually. The insurance industry would hope that this is done gradually.
