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HDFC Life To See A 10-12% Topline Impact Due To Budget Announcement: CEO

The Finance Minister declared in the Union Budget that insurance payouts on premiums paid above Rs 5 lakh would be taxed.

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

Shares of life insurance companies took a beating after the Finance Minister declared in the Union Budget on Wednesday that insurance payouts on cumulative premiums paid above Rs 5 lakh would be taxed.

HDFC Life Insurance's managing director and chief executive officer, Vibha Padalkar, told BQ Prime that the move could cause a 10-12% impact on the company's top line and a lesser impact on its profitability.

She said that the finance minister's objective is to withdraw tax benefits from HNIs and ultra-HNIs.

Explaining the announcement, Arihant Bardia, chief information officer and co-founder of Valtrust Capital, said that if the premium paid on insurance policies—excluding unit-linked insurance products—exceeds Rs 5 lakh in a year, then the proceeds from those policies would be taxable, except in the case of a death benefit.

The government had previously introduced a similar provision for ULIPs in 2021. It taxed the maturity amount of ULIPs if the aggregate premium exceeded Rs 2,50,000 per annum.

Padalkar said that this is applicable on an aggregate basis. If an individual purchases a policy with a premium payment of Rs 3 lakh in year one and a policy with a premium payment of Rs 4 lakh in year two, the individual's cumulative premium expenditure exceeds Rs 5 lakh.

In the case of payouts on these two policies, payouts to the extent of Rs 5 lakh would be exempt in the hands of the individual, while the payout on the remaining Rs 2 lakh worth of policy would be taxable.

However, for the existing policies, there is clear grandfathering, she said.

Another industry executive, speaking on the condition of anonymity, told BQ Prime that payouts on policies sold through Mar. 31 would still be exempt and that the announcement would apply to new sales beginning in April.

Vighnesh Shahane, managing director and chief executive officer, Ageas Federal Life Insurance, said, "This proposal is likely to dent the sales of non-par products, which have been witnessing strong growth over the last few years, especially during the pandemic. As the cap of Rs 5 lakhs is applicable to all life insurance policies across insurers, it may deter individuals from purchasing additional policies if they have exhausted their limit with their primary insurer."

Bardia said that overall, the news is bad for insurance companies because it will affect policies with high premiums, which will hurt the growth of the industry's gross written premiums, he said. However, protection products and smaller policies will not be impacted, Bardia said.

Padalkar has pegged the overall industry gross written premium impact in the range of 10% to 15%.

Prithvish Uppal, an insurance analyst with AMSEC, told BQ Prime that the move would primarily impact companies that have a higher exposure to HNIs.

While the disclosures with regards to ticket sizes of premium contributions exceeding Rs 5 lakh are not available, he said, the overall impacted portfolio for major listed private life insurers—according to the nine-monthly FY23 disclosures on an annualised premium equivalent basis—are as follows:

  • ICICI Prudential Life Insurance: 35% of their product mix.

  • HDFC Life Insurance: 45% of their product mix.

  • SBI Life Insurance: 30% of their product mix.

  • Max Financial: 42% of their product mix.

According to industry sources, it is expected that Life Insurance Corp. will not be impacted much as it has a larger number of low-ticket policies.

Impact On HDFC Life-Specific Policies

Bardia had noted in his statement that "HNIs used to love the HDFC Sanchay products that gave a post-tax IRR (internal rate of return) of 5–6%; this benefit will go away for policies that have an annual premium exceeding Rs 5 lakh."

Padalkar said that HNIs would not just buy this policy for the tax benefit but also for the fact that it provided long-term assurance of rupee value. "No other product can give that comfort, as long as we are in the zone of debt mutual funds and bank fixed deposits demand for products like Sanchay Plus will still be there."

HDFC Life To See A 10-12% Topline Impact Due To Budget Announcement: CEO