Why did insurance stocks drag after budget 2023 announcements?

After the speech outlining the budget proposal for 2023, the Sensex rose today by 158.18 points, or 0.27%, while the Nifty fell by 45.85 points, or 0.26%, to close at a level of 17,616.30. While declaring the Budget, FM said that insurance buyers must pay tax on insurance proceeds if the premium paid exceeds ₹5 lakhs, and the same triggered the insurance stocks to come under pressure. Indian insurance businesses suffered the most after the budget, with SBI Life losing 8.61% of its value and ending at ₹1,114.50, HDFC Life losing 10.79% and ending at ₹516.40, LIC losing 8.01% and ending at ₹601.00, and ICICI Pru losing 11.51% and ending at ₹400.35.

“It is proposed to provide that where aggregate of premium for life insurance policies (other than ULIP) issued on or after 1st April, 2023 is above ₹5 lakh, income from only those policies with aggregate premium up to ₹5 lakh shall be exempt. This will not affect the tax exemption provided to the amount received on the death of person insured. It will also not affect insurance policies issued till 31st March, 2023,” said the Union Finance Minister, Nirmala Sitharaman.

Mr. B Gopkumar, MD & CEO, Axis Securities said “An extremely well-balanced budget focussed on growth driven by capital expenditure while giving an adequate push to rural welfare and agriculture. Government borrowing is well-calibrated, and it is a significant positive. The fiscal deficit target of 5.9% indicates a considerable degree of prudence. On top of this, relief to the middle class on the income tax front is the cherry on the cake. At this point, it is difficult to find any shortcomings. The budget has delivered on all the expectations very well. In the short term, we expect the markets to move higher on the back of pro growth measures announced in the budget and less fear of the government crowding out private investments due to fiscal prudence shown by the government. The market has not held up on the gains, as, again, Banks and Adani group stocks have come under pressure apart from a correction in insurance stocks due to changes in taxation laws.”

Indian insurance companies suffered the most after the budget, with losses ranging from 4.5% to 11% for HDFC Life, SBI Life Insurance, ICICI Prudential Life Insurance Co, Life Insurance of India, General Insurance Corp, and Max Financial. After the budget announcement, the two indices that gained the most are NIFTY FMCG up by 1.13% and S&P BSE MidSmallCap up by 1.84%, respectively, this came after FM’s announcement that the personal income tax rebate limit would be increased to ₹7 lakhs from ₹5 lakhs, that customers with 5% cash receipts would receive tax relief, and that there would be a reduction in the number of income tax slabs from 6 to 5.

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo said “One of the major setbacks that is given in the finance bill is related to the taxability of the maturity proceeds of a life insurance policy. As per the budget 2023, the maturity proceeds of all life insurance policies that are issued after 1st April 2023 and have an annual premium of more than Rs. 5 Lakhs will now be taxable. One should note that if an individual has more than one life insurance policy which is issued on or after the 1st of April 2023 and also if the aggregate amount of premium of such policies exceeds 5 lacs, then the maturity amount will be taxable. However, the death benefit continues to remain tax-exempt from such life insurance policies, and it is not applicable to ULIPs. This move is definitely negative for the insurance industry and will impact related stocks. Post the budget, the market has seen a fall in the stock prices of HDFC life, SBI Life and Max as they are down by around 7%.”

Mr. Vishal Chandiramani, Managing Partner- Products & COO, TrustPlutus Wealth said “The Union Budget has proposed that any income received from insurance policies other than ULIPs where the premium paid is more than INR 5 lacs, shall be taxable. Such income was tax exempt until now. This is applicable for policies purchased after 1 April, 2023 where the premium is more than INR 5 lacs. Also, the proposal will not affect the tax exemption provided to the amount received on the death of the person insured. The above proposal seeks to remove income tax exemption on high value policies. This is negative for insurance companies that had launched several policies targeted at HNI and UHNI individuals where the premium payable was above INR 5 lacs and the returns from the insurance policies were tax free. However, a possible benefit of this proposal is that individuals may focus on purchasing term plans and look at insurance not as a tool for making returns but purely from the view of covering risk.”