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Budget 2020 | Removal of exemptions in new tex regime to impact life insurers, MFs

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Removal of tax exemptions under Section 80C in the new tax regime could be dampener for life insurance products as well as equity-linked savings schemes (ELSS) of mutual funds.

In her Budget speech on February 1, Finance Minister Nirmala Sitharaman said a salaried professional opting for a lower tax rate under the new regime will not be eligible for deductions, including insurance premium paid and ELSS investments.

“The removal of 80C benefit may pose a risk to new business volumes of life insurance companies,” said Kotak Institutional Equities in a report.

Life insurance

Tax exemptions are an important incentive for purchase of life insurance. To be eligible for exemption under Section 80C, the sum assured has to be 10 times the annual premium. This is part of the Rs 1.5 lakh limit under this section.

But now, those who opt for the new tax regime will not be eligible to claim any deduction under Section 80C.

It is likely that those earning annual income between Rs 5 lakh to 7.5 lakh could switch to the new regime and hence will not have any incentive to buy an insurance product.

Though tax saving is not the only objective to buy life insurance, it is one of the motivators. Life insurers are hopeful that fewer people opt for the new regime.

Kamlesh Rao, CEO Aditya Birla Sun Life Insurance, said the insurance industry will be watchful of the implication of direct tax changes in the new tax regime.

As soon as the new regime was announced on February 1, life insurers' stocks were hit. Currently, HDFC Life Insurance, ICICI Prudential Life Insurance and SBI Life are listed on the stock market.

Shares of Max Financial, which holds Max Life, gained 8.65 percent intraday today (against a 12.8 percent fall on Budget day), ICICI Prudential rose 1.69 percent (against a correction of 10.93 percent), HDFC Life gained 1.80 percent (against a fall of 6 percent) and SBI Life was up 3.12 percent (against a decline of 10 percent).

The high reliance on the fourth quarter for premium collection by life insurers has however come down. Since Q4 is when individuals buy life insurance to claim deductions, a major portion of the new premiums would come in the January to March period.

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