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

A salaried professional opting for a lower rate of tax under the new regime will not be eligible for deductions, including insurance premium paid and ELSS investments.

Removal of tax exemptions under Section 80C in the new tax regime could be a 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 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.

The Kotak report said the overall business booked by insurance companies in Q4 was down to around 35 percent in FY19 from more than 50 percent in FY05.

Mutual funds

On the mutual funds front, fund officials said that the ones who opt for the old regime will receive the ELSS exemption.

In the past few years, mutual funds have witnessed robust inflows in ELSS schemes considering that there is a lock-in of three years as against five years in life insurance.

The assets under management of ELSS schemes stood at Rs 99,817 crore in December 2019 as against Rs 88,512 crore a year ago and Rs 80,891 crore in December 2017.

"If a large set of individuals opt for the new regime, then they will not go for schemes like ELSS as there is no exemption in the new regime,” said Jimmy Patel, CEO of Quantum Mutual Fund.

Concurring Patel's view, Uday Ved, Tax Partner, KNAV said, “We believe more millennials may opt for the new regime to avoid the investment hassles as some of their investment burden is already borne by their parents. To that extent, life insurance and ELSS schemes may take a hit. Also, the new regime would not create more tax liability compared to the existing scheme.”

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