Questions raised on LIC float, removal of tax exemptions

Moreover, removal of the dividend distribution tax benefit will affect the margins of IPRU & HDFC Life, with a one-off impact on EV, the note said.
Life Insurance of India LIC

New Delhi, Feb 4 : Questions are being raised whether the government made a mistake in announcing the mega IPO of Life Insurance Corporation (LIC) and in the same Budget, created an alternate tax regime in which tax exemptions under Section 80C of the Income Tax Act will be withdrawn.

In a note, foreign brokerage Jefferies pointed this out, asking whether talking about Life Insurance Corporation listing and removing Section 80C benefits was a mistake.

It said that the government’s plan to list the insurance behemoth in the coming year is a bold timeline, given complexities of size, structure & legacy. LIC’s retail business is largely par-savings targeted to middle and low-income households for tax-planning purposes. “Thus, diluting the tax benefits on insurance will affect LIC the most,” the note said.

Beyond the obvious impact of removing the tax exemption on insurance under the alternate personal tax system, the budget sent insurers a strong message to shift their sales pitch away from tax-exempt instruments and toward solutions for savings and protection (HDFC Life & IPRU look better placed than SBI Life).

Moreover, removal of the dividend distribution tax benefit will affect the margins of IPRU & HDFC Life, with a one-off impact on EV, the note said.

On the removal of tax benefits on insurance under alternative personal tax system, the report said that prima facie, providing optionality under the personal tax regime disadvantages insurance products.

Most premiums currently enjoy a tax advantage, but uncertainty lies in the part that is largely motivated by the tax benefit (mainly lower-ticket ULIPs & par savings). However, given that the alternate tax system does not benefit individuals with less than Rs1.5 million income or those claiming the full deduction, the impact on growth for insurers may not be that large.

On what happens to the insurance industry, if exemptions are removed altogether, Jeffries said that the government’s aim to gradually remove all tax exemptions seems clear.

“Thus, we think there will be a need to shift the selling pitch away from tax-exempt instruments toward solutions for savings & protection. Companies with a higher mix of protection, annuity & fixed-return savings products look better placed,” it added.

It notes that disposable income under new tax system is around 20-25 per cent higher which may enable shifting. Absolute tax payouts under the alternate tax regime versus the current one, adjusted for exemptions, are largely similar. However, disposable income for less than Rs 15 lakh income individuals rises by around 20-25 per cent under the alternative system.

“Given this category’s high propensity to spend, we would expect a shift to the alternate tax system,” the brokerage said.

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