India opened up the insurance sector for private players, including 26 per cent cap on foreign direct investment, in 2000. Over time, the FDI limit has gone up to 74 per cent. In what could lead to another major shake up in the industry, the Union Budget this year has proposed allowing 100 per cent FDI in the insurance sector.
"The FDI limit for the insurance sector will be raised from 74 to 100 per cent. This enhanced limit will be available for those companies which invest the entire premium in India. The current guardrails and conditionalities associated with foreign investment will be reviewed and simplified," Finance Minister Nirmala Sitharaman announced in her Budget speech on Saturday.
Since opening of the sector, the insurance industry in India has expanded from seven largely state-owned entities to over 60 companies now. Several large Indian financial services companies have set up insurance ventures in partnership with global insurance firms.
The move towards 100 per cent FDI, is sure to peek the interest of large global insurance giants, and could over time bring in significant foreign investment in the country.
"Budget 2025 marks a transformative step for the insurance sector in India, particularly with the introduction of 100 per cent FDI. This reform is set to drive deeper market penetration by attracting greater capital inflows, fostering competition and integrating global best practices," noted Naveen Chandra Jha, MD and CEO of SBI General Insurance.
Vibha Padalkar, the MD and CEO of HDFC Life Insurance pointed out that the FDI limit in insurance was raised from 49 per cent to 74 per cent in 2021 and increasing this further to 100 per cent would be beneficial to the industry if it translates to an increase in capital investments and subsequent growth in insurance penetration.
"Greater foreign participation will accelerate the adoption of global best practices, introduce innovative products and elevate customer service standards. Additionally, the mandate to invest premiums within India ensures that these funds contribute to domestic economic growth and infrastructure development," said Tarun Chugh, MD and CEO of Bajaj Allianz Life Insurance.
Despite this announcement, barring select insurance companies, stocks of several, especially life insurance companies, declined on Saturday. While SBI Life and HDFC Life fell 2 per cent, ICICI Prudential Life Insurance slipped 1.6 per cent and Go Digit General Insurance was down 0.5 per cent. On the other hand, ICICI Lombard, Star Health Insurance and LIC ended higher.
A key reason behind the fall in shares of select life insurance companies was perhaps a confusion around the taxation of unit-linked insurance policies (ULIPs) with some feeling that all ULIPs would now be taxed. The Budget statement clearly clarifies on this front.
"It is proposed to clarify that the profit and gains from the redemption of unit-linked insurance policies to which exemption under section 10(10D) does not apply, shall be charged to tax as capital gains," according to the Budget statement.
ULIPs differ from traditional life insurance policies as a significant portion of the premium in ULIP is invested in the stock market. Thus far, where the premium didn't exceed Rs 2.5 lakh, the amount received on redeeming the ULIP was tax-free. However, there was ambiguity in case where the premium exceeded Rs 2.5 lakh.
According to Section 10(10D), any sum received under a life insurance policy is typically exempt from taxation provided certain conditions are met. There was an amendment for ULIPs purchased after February 1, 2021, whereby the tax exemption on maturity was only available if the total premium paid in a year didn't exceed Rs 2.50 lakh.
Insurance executives have welcomed the clarification in this Budget.
"Currently ULIPs issued on or after February 1, 2021, with aggregate annual premium above Rs 2.5 lakh, which are not exempt under section 10(10D), are taxable as capital gains. We now welcome the clarity on taxability of non-exempt ULIPs, issued before February 1, 2021, as capital gains, by rationalisation of relevant income tax provisions," said Padalkar.
Chartered accountant Suresh Surana said the current amendment has now made the tax treatment given to all ULIP policies consistent.
"This move is expected to streamline the tax treatment of ULIPs and other insurance policies and help taxpayers better understand how to plan their finances and tax obligations around life insurance investments," he said.
