Financial companies feel I-T changes will hit industry, taxpayers

Mumbai: Top insurers and financial sector stakeholders have raised concerns that the proposed direct tax regime could lead to reduced household savings in the economy, likely affecting fund flows to financial instruments traditionally undergirded by tax-break cash pools.

They believe that in the absence of tax benefits on savings and risk products such as ULIPs and ELSS, policyholders may withdraw from these schemes that have traditionally been seen as the source of financing for larger cash pools, many of which underpin infrastructure projects.

Stocks of insurers and financial companies led decliners on Saturday in Mumbai.


Simultaneously, consumption incentives might even discourage financial prudence in managing personal wealth, which could be counter-productive for consumption itself in the long run.

“Risk management through insurance is an essential part of nation building,” said R M Vishakha, CEO Indiafirst Insurance. “In India, the construct has always nudged future savings and risk management through conscious investment, supported by tax relief. We have not seen announcements that will encourage risk management practices.”

Finance Minister Nirmala Sitharaman has proposed the removal of at least 70 deductions that taxpayers enjoyed in the earlier regime through amendments to the section 80C of the Income Tax Act.

“The introduction of the new tax regime may have a negative impact on the demand for various financial products like ELSS, life insurance, medical insurance, pension plans, etc. Choosing the new regime may adversely affect the financial health of tax-payers,” said Naveen Kukreja, CEO, Paisabazaar.

Echoing the sentiment was the country’s largest lender State Bank of India.

“In principle, the new tax proposals, though noble in intention, might not stimulate consumption demand immediately as India is a country with limited social security access and it is imperative that we incentivise household financial savings,” according to SBI’s budget note. “For example, the current exemptions under 80C are a big contributor to flows into Mutual Funds (ELSS), insurance companies, etc. If these are taken away, flows to these savings schemes can see a drop.”


The new ‘simplified individual tax regime’, although optional, could lead to a migration of several policyholders of life insurers, industry experts say. This transition can also adversely impact businesses of life insurance and mutual fund companies. The reduction in new tax rates was brought about largely to lift consumption demand.

ULIP or Unit Link Investment Plan is an investment plus insurance product where one part of the investment is used for insuring the investor, while the other part is invested in equity, debt, hybrid, or money market funds through ULIPs.

Equity Linked Savings Scheme or ELSS on the other hand is a diversified, equity mutual fund that invests in the capital markets. Both products were popular among taxpayers as they could enjoy tax benefits on these schemes. In FY19, the size of the ULIP market had expanded 17 per cent to Rs 76,152 crore, according to data from the Insurance Development and Regulatory Authority (IRDAI). There were 11.5 million ELSS portfolios with a size of Rs 93,980 crore, data from the Association of Mutual Fund in India (AMFI) showed.

“We need to wait and observe whether and what proportion of taxpayers opts for the reduced tax rates, and the effects that would have on the savings culture of households,” said G Murlidhar, managing director, Kotak Mahindra Life Insurance Company.