The Union Budget 2020 offered a new personal tax option to tax payers and the finance minister has indicated that the old regime may be phased out over time.
Discussing in detail how this new regime would impact the attractiveness of savings products of insurance companies, Prashant Tripathy, MD & CEO of Max Life Insurance said, “Savings continues to be large part of the life insurance offering. In terms of new sales, upwards of 95 percent at an industry level will be savings products that get sold but in terms of number of policies, we have been working hard to change. My sense is at least for the top 5 life insurance companies about one-third number of policies will be coming from pure protection.”
“Life Insurance is bought for two purposes – one is to save on taxes when you make investment and two, it is also bought because the proceeds of life insurance are also tax deductible under section 10(10D). So, be the new regime or old, that deduction of tax is available and that could be a large consideration for making investment in life insurance, said Tripathy.
Talking about new tax regime, he said, “For most of the customers, it will make sense to remain on the previous regime and continue to claim deductions under 80C which is similar to how it was before, and also under regime there is a very high consideration and logic for people to invest in life insurance because Section 10(10D) benefits will be available.”
I personally do not anticipate huge impact on life insurance products just because 80C has become optional and that people won’t make investment in life insurance,” he added.
For people who are moving into workforce and who don’t claim exemptions with respect to investment in house etc, the new tax regime may appear beneficial initially but that segment of customers is not a large segment for the company, said Tripathy.
He further said that the government might do away with exemptions completely but hope it doesn’t happen. This hope is based on rationale and logic, he added.
On dividend distribution tax (DDT) front, Tripathy said, “Instead of tax reduction at source (TDS) for the company which was declaring the dividend, it is taxable in the hands of the recipient. However, for a company like Max Life Insurance which has also been declaring dividend, you will get an offset. So for the last 5 years the dividend that we have been declaring to our shareholders has been more than the dividends that we have been receiving. So it will have a big role to play in terms of negating the impact. However, the worst case scenario will be margin impact of anywhere between 50 bps and 80 bsp, which will be about 3-4 percent impact on our margins.”
“On an embedded value level we are still to make a determination and my sense is that it could be in the range of about 1-1.5 percent of embedded value impact,” he said, adding that as the finance bill is finalized we need to run our cash flow models to see what is the impact, we will embed that from next year.