Impact of DDT On New Business, Insurance

Sanjay Tiwari, Director, Strategy at Exide Life Insurance in an interview with Himali Patel explains that the removal of Dividend Distribution Tax (DDT) could impact the value of new business of Insurance companies.

What has been the impact of budgetary announcements on life insurers? 

This Union Budget has taken a bold step with the reduction in exemptions. As per government reports, in 2018-19, only 9 per cent of the taxpayers in the country exhausted their tax benefit limits including 80C and other deductions. With the new budget, people will have more freedom of choice as savings will no longer be influenced by tax rules. Change in the tax slabs will result in reducing surplus savings.

In Budget 2020, the government has removed various exemptions under the new tax regime, do you think this would take away the key incentives for life insurance companies that drives the sale of life insurance products?  

Although 80C did allow for a certain push in the life insurance products, we expect the revision to have a very modest impact on sales. Consumer behavior is also evolving in terms of buying insurance for the right reasons, such as life protection and planning their corpus for retirement, rather than just for tax-saving purposes. This is evident from the increase in protection share or pension across the industry. To boost the segment further, it would be desirable for the government to take steps towards reducing GST rates on protection plans.

The culture of saving remains deeply ingrained in Indians and while exemption has been reduced, the overall savings should not be influenced. The new rules remove the limitation on the scope of saving through insurance that happened due to the cap on 80C, offering people a broader canvas to plan their financial security.

With the abolishment of DDT and to make dividends taxable in the hands of individuals, would this result in higher tax rates for life insurers going forward?

On the face of it, removal of dividend distribution tax and the move of making the dividends taxable in the hands of recipients may impact the embedded value and value of new business. However, it needs to be evaluated in detail to arrive at the actual impact given the fact that life insurers have different product mix and way of managing dividend payouts.