Insurers could find it hard to sell life and health insurance policies, as the enhanced benefits under the new income tax regime reduce their appeal, particularly for those investing in insurance for tax-saving purposes.
Finance minister Nirmala Sitharaman on Saturday proposed that no income tax will be levied on those earning up to ₹12 lakh under the new income tax regime. Tax slabs have also been rationalised with an aim to boost household consumption, savings and investment.
Under the old regime, taxpayers could claim deductions of up to ₹1.5 lakh under Section 80C, including for life insurance premiums, and an additional ₹25,000 (₹50,000 for senior citizens) under Section 80D for health insurance.
The new regime eliminates these deductions but offers lower tax rates, diminishing the incentive to invest in insurance solely for tax benefits.
“The government is definitely trying to make the new tax regime more popular and it will try to provide additional benefits in coming days,” said SR Patnaik, partner (head – taxation) at Cyril Amarchand Mangaldas. “Insurance companies need to convince people to look at insurance policies for their inherent benefits and not merely as tax-saving products.”
About 72% of income tax payers have already moved to the new regime, which offers lower tax and lesser deductions.
A private general insurance industry official, however, said tax deductions were never a dealbreaker ― especially in health insurance. “The COVID-19 pandemic has significantly increased the awareness about the importance of health insurance. With healthcare costs rising at around 14% annually, people recognise the genuine need for health coverage, with or without tax benefits,” the official said. It may be mentioned that retail health insurance premiums have tripled, growing from ₹14,000 crore in FY20 to ₹42,200 crore in FY24.
“Selling life insurance has been difficult since the new regime,” said a private life insurance industry executive. “Even existing customers are questioning the need to renew their policies if there’s no tax benefit.”
This comes at a time when India’s insurance penetration slipped to 3.7% in FY24 from 4% in FY23, with life insurance penetration falling to 2.8% from 3%.
Tarun Chugh, MD and CEO of Bajaj Allianz Life Insurance, has downplayed the new tax regime’s impact on the life insurance business. “Over the years, customers have become more financially aware and no longer view life insurance solely as a tax-saving tool,” he said. He noted that the regulator has introduced a slew of reforms to boost awareness and make life insurance more accessible and affordable.
On Saturday, shares of private insurers such as SBI Life, HDFC Life and ICICI Prudential Life fell 7-8% during intra-day trade. They made some recovery and closed with losses of 2-3%.