Insurers, MFs worried about impact of Sitharaman's tax 'sop'

While the proposed new tax regime is optional for taxpayers, the finance minister has said the government eventually wants to do away with all exemptions with a lower tax-rate simplified structure.

The new proposed tax code, which offers lower rates to taxpayers but denies exemptions and deductions, has created uncertainty for insurers and mutual funds, which attract sizeable investor flows into tax-saving products.

“Thirty-forty per cent of the flows into insurance come in for tax-saving.

"So, we need to rework on how to regain business, which could be threatened if potential investors opt for the new tax regime,” said the chief executive officer of a leading domestic insurance company.

On Saturday, insurance stocks had come under heavy selling pressure.

SBI Life Insurance closed 10 per cent lower.

ICICI Prudential Life Insurance (10 per cent) and HDFC Life Insurance (6 per cent) were the other major losers on Saturday.

“Growth could be challenged in the next financial year. This hurts predictability in our business model in the near-term.

"Insurers will now have to worry about the possibility of the new tax regime being made mandatory,” the executive added.

While the proposed new tax regime is optional for taxpayers, the finance minister has said the government eventually wants to do away with all exemptions with a lower tax-rate simplified structure.

“If more taxpayers shift towards the new tax-code, the 80C category and the associated industries will be at a disadvantage.

"Apart from ELSS (equity-linked savings schemes) products offered by mutual funds, which were notified under 80C, insurance products will also be at a disadvantage,” said Jimmy Patel, chief executive officer of Quantum Mutual Fund.

Assets managed by the ELSS category stand at Rs 1 trillion at present.

While the flows coming into ELSS category are not large, they are sticky in nature because of the three-year lock-in.

“These flows help mutual funds in the closing months of the financial year, when investors are looking for tax-saving options,” said a fund manager.

Experts say more than mutual funds, insurance companies are likely to feel the impact of the new measure.

“The new regime could hold back flows to unit-linked insurance plans (ULIPs).

"The pure-play insurance products - including life and health - may still be able attract investors because they are meant to give cover for contingencies,” says Amol Joshi, founder of Planrupee Investment Services.

“Risk management through insurance has been essential. In India, the construct has always nudged future savings and risk management through encouraging investment aided by tax relief.

"We have not seen announcements that will encourage risk management practices,” says R M Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance.

• BUDGET 2020