Mumbai: The government’s decision to make tax breaks optional for savers at a time when it plans to list Life Insurance Corporation of India (LIC) could fetch lower valuations for North Block’s biggest money manager, with traditional tax incentives for insuring lives now facing the chop.

Valuations of leading life insurers continued to remain squeezed as these companies adjust to new business realities under the government’s proposed direct tax regime, which includes removal of tax exemptions on the popular unit linked products that combine savings with insurance.

“LIC’s retail business is largely par-savings targeted to middle and low-income households for taxplanning purposes. Thus, diluting the tax benefits on insurance will affect LIC the most,” according to a report by global brokerage Jefferies. “The government plan to list the insurance behemoth in the coming year is a bold timeline, given the complexities of size, structure and legacy.” Even as some insurers saw their stocks climb Monday after the budget day fall, the shares of top life insurers such as ICICI Prudential, HDFC Life and SBI Life remained at levels lower than their pre-budget close. While ICICI Prudential’s shares were down 12.6 per cent, HDFC Life’s shares traded 5.8 per cent lower than their prices on Friday. SBI Life’s shares were also down 8.6 per cent.

It is estimated that LIC at pre-budget market environment could be valued at Rs 8-10 lakh crore, and a 10 per cent stake sale could fetch the government upward of Rs 80,000 crore, helping it meet a significant portion of its Rs 2.1-lakhcrore disinvestment target of FY21.

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However, finance minister Nirmala Sitharaman’s proposed removal of at least 70 deductions that taxpayers enjoyed in the earlier regime through amendments to the section 80C of the Income Tax Act puts a question mark on these estimates.

Among those instruments where benefits have been removed include Unit Link Insurance Product or ULIPs, a popular risk product among taxpayers where a part of the investment is used for insuring the investor, while the other part is invested in equity, debt, hybrid, or money market funds.

“Every insurance company, in terms of growth, should be marginally affected,” said Kajal Gandhi, analyst, ICICI Direct. “The new generation may not go for savings products of LIC or any other insurer and just prefer a term plan. In the absence of tax benefits, they’d prefer to have more cash in hand for consumption purposes.”

The share of ULIP to overall premiums for life insurers over FY19 grew to 15 per cent from 14.3 per cent. While the traditional premiums in this period grew by 9.65 per cent to Rs .4.31 lakh crore, the ULIP products registered a growth of 17 per cent to Rs 76,152 crore, according to data from the Insurance Development and Regulatory Authority (IRDAI).

“This is clearly not the right timing for the announcement of the LIC IPO because you cannot be doing two diametrically opposite things at the same time,” said one analyst, requesting anonymity. “However, it’ll be difficult to determine the extent of the actual impact on the business as insurance companies don’t track the percentage of policies that are bought just to avail these tax benefits.” As reported by ET on February 3, several leading market participants and insurers have raised concerns that the new tax regime, though optional, could prompt policyholders to migrate out of ULIP schemes to pay less taxes under the new income tax slabs. “If an individual opts for the new tax regime slabs, they would be forgoing tax exemptions, which are a part of the earlier tax regime, and may end up spending the money than use it toward (ensuring) their financial safety and security,” said Tarun Chugh, CEO, Bajaj Allianz Life Insurance.

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