Shares of life insurance companies fall under the scheme of taxation relating to policies.

Shares of major life insurance companies tumbled on Wednesday following the finance ministers' announcement to tax income from insurance policies having premium above Rs 5 lakh in a year, for policies issued on or after April 1, 2023.

Shares of life insurance companies tumbled by up to 11 per cent on Wednesday after the government announced to limit income tax exemption from proceeds of insurance policies in certain cases.

ICICI Prudential Life Insurance Company dropped 10.97 per cent to close at Rs 402.55 on the BSE. HDFC Life Insurance Company Ltd fell 10.96 per cent, Max Life slumped (9.45 per cent), SBI Life Insurance Company Ltd (9.31 per cent) and Life Insurance Corporation of India (LIC) (8.38 per cent).

According to Union Budget documents, an individual will have to pay tax on the maturity amount of life insurance policies where the aggregate annual premium exceeds Rs 5 lakh.

Finance Minister Nirmala Sitharaman in the Budget on Wednesday proposed "to provide that where aggregate of premium for life insurance policies (other than ULIP) issued on or after April 1, 2023, is above Rs 5 lakh, income from only those policies with aggregate premium up to Rs 5 lakh shall be exempt".

This will not affect the tax exemption provided to the amount received on the death of a person insured. It will also not affect insurance policies issued till March 31, 2023, she said.

Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance said the announcement is bit of a dampener for the insurance industry and for increasing penetration of insurance and household financial savings in India.

“The proposal talks about income being taxed. Ideally, the capital, which is the premium being paid, should not come under taxation,” said Vibha Padalkar, MD & CEO, HDFC Life Insurance.

“So, we would represent the government to bring us at par with, say, debt mutual funds wherein the premiums are deducted and only the capital gains, post indexation is taxed. The likely impact on our company will be 10-12 per cent on the top line and lesser on the bottom line. We will strive to sell more to middle-class customers, which has anyways been our stated objective. Secondly, as long as we are competitively priced compared to the alternative instruments, there will be demand for such products,” she said.

Shares of large life insurance companies like LIC, ICICI Prudential Life and HDFC Life took a beating after the announcement.

“The returns on traditional policies are already muted unlike Ulips. Now, the government has proposed to take away the 10(10D) tax benefit from insurance policies with over Rs 5 lakh premium. This could render these policies uncompetitive,” Vignesh Shahane, MD & CEO, Ageas Federal Life Insurance. "While the tax rate has not been made clear, I am assuming they could impose long term capital tax gains (LTCG) but it could also be on the income slab. It's not a positive development for the life insurance industry."

Nilesh Sathe, former Member (Life) Irdai says, "In the past, the government had been taxing maturity proceeds (and not income, which is maturity minus premium paid) on short-term policies. So, we shall have to wait to find out how the government defines income."

"This is not likely to impact our retail policies, which have an average ticket size of Rs 50,000 – 100,000 but we do have some portions of high value policies. Having said that, I assume the high-net-worth individuals will continue to buy these policies because there is no other instrument which offers customers a fixed return for 20 – 30 years. Industry hopes that the indexation benefits offered to other instruments is offered to insurance as well so that policy holders are not disadvantaged compared to investors in other instruments", said Mahesh Balasubramanian, MD&CEO, Kotak Life Insurance.