From 80C To ULIPs: Why Life Insurance Investors Fear Budgets And Why Budget FY27 Is Different?

The run-up to the Union Government's Budget Presentation (1 February) for the coming fiscal year is causing volatility in life insurance stocks because of the precedent created by budgets over the last six to seven years, which primarily coincides with the history of listed life insurers in India. The budget has made life insurance products less appealing, whether it is due to the several rounds of changes made to the personal income tax regime (which began on February 20) or the tax limits on ULIP and traditional policy proceeds after maturity.

Long-term resource mobilization, a crucial necessity in a capital-constrained nation like India, has been impacted by the declining value proposition of Life Insurance Savings products. Despite these recent setbacks, there is almost no chance that the life insurance industry will be addressed in this budget.

"Our confidence is underpinned by the fact that the government is concerned about the large underinsured and uninsured population and has acted by bringing GST reforms and passing of the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Bill, 2025. The sustained mention of high operating cost being a detriment to increasing insurance coverage, in the IRDA Annual Report, RBI FSR, and now in the Economic Survey clearly indicates that the government and regulator intend to increase insurance coverage. Hence, by taking a GST hit, the government has done its bit, and now wants insurers to step up on their part. In this backdrop, it is unlikely that the budget will tinker - to any extent - the corporate tax rate for life insurers or personal income tax for individuals, to avoid hurting the government's effort to increase life and health insurance coverage," said Emkay Global Financial Services in a report.

Recent history of union budgets instils fear

Most of the budgets in the past 5-6 years (a period coinciding with the public listing of life insurers) have given enough reasons to investors of Life Insurance companies to fear the upcoming budget.

As per Emkay Global Financial Services, some of these actions include: i) the Feb-20 Budget introduced a 'New Tax Regime' characterised by 'no deduction', leading to Income Tax Act Section 80C linked-driven Life Insurance getting affected; ii) the Feb-21 Budget introduced long-term capital gain tax (LCGT) on ULIP with premiums above Rs0.25mn, bringing parity with equity mutual funds; iii) the Feb-23 Budget made maturity proceeds of non-linked (traditional) policies with annual premium above Rs0.5mn taxable, with Section 10(10D) exemptions being limited to policies with annual premium less than Rs0.5mn; iv) the Feb-25 Budget brought clarity that any ULIP policies (above or below Rs0.25mn annual premium), if not meeting the sum assured (≥10x annual premium) will attract LCGT.

"The only hanging sword for the industry is the preferential corporate tax rate for Life Insurance (12.5% + surcharge and cess = 14.56%) versus the normal corporate tax rate of 25.7%. There are reasons for the preferential rate; however, the fear of such benefits being withdrawn has resurfaced ahead of every budget," the brokerage further added.

This time it is different

The sequence of actions from the government and regulator in the past 6 months suggests that this time it is different, and the government and regulator are concerned about stagnating insurance coverage and a large uninsured and underinsured population. The government has removed GST on Individual Life and Health Insurance to make these products more affordable, and it has also passed the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Bill, 2025, to empower the sector for the next leg of growth.

"The IRDAI Annual Report, RBI FSR, and now the Economic Survey - all have flagged the high operating cost of insurance being detrimental to increasing insurance coverage. In this backdrop, we see a limited possibility of the upcoming Union Budget tinkering personal income tax or corporate income tax aspects that may affect the product proposition of Life Insurance products or the cost-to-profitability of life insurers," Emkay Global Financial Services stated.

Ball to be in insurers' court to address the cost issue and increase coverage

According to Emkay Global Financial Services, by exempting Individual Life and Health Insurance from the GST ambit, the governments (central and state) have taken the hit on their revenue, and their message to the industry is clear. Now it is the industry's turn to deliver by addressing the insurance coverage for the uninsured and underinsured. Addressing the high cost is critical.

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