Tax Benefit Removal Hits Life Insurance Sales, Says Deepak Parekh

Speaking to the media on the sidelines of the 2nd Edition of CII BFSI Summit on Tuesday, Parekh said that life insurance earlier saw strong growth largely because premiums qualified for tax deductions.

"Insurance was growing rapidly because the amount of premium you paid was allowed as a deduction from your income... But now that benefit is removed, new insurance policies have come down because of the tax benefit being removed," he said.

The change is linked to the introduction and expansion of the new tax regime, which became the default option from April 1, 2023. Under this system, key deductions such as Section 80C -- which allowed tax benefits on life insurance premiums and certain bank deposits -- and Section 80D -- for health insurance -- are no longer available.

Additionally, for policies issued after April 1, 2023, maturity proceeds are taxable if annual premiums exceed Rs 5 lakh, although death benefits remain tax-free.

Despite the decline in new policy sales, Parekh stressed that insurance continues to be a critical financial product for households.

"It is a savings product and a must for every family because life is uncertain. If something happens to the breadwinner, the policy provides financial support," he said.

Parekh also spoke about the growing importance of Real Estate Investment Trusts (REITs) in India. He described REITs as a solution to bridge the gap between developers and businesses seeking office space.

He explained that many companies, including IT firms, data centres and global capability centres, prefer renting large office spaces rather than owning them. On the other hand, developers prefer to sell properties to recover their investments.

REITs, he said, allow large investors to buy properties, bundle them together and offer them as investment products, giving returns and some capital appreciation.

"REITs have become very popular and will grow further as more and more space gets rented out," he added.

On the broader banking, financial services and insurance (BFSI) sector, Parekh said that there is no major cause for concern despite global uncertainties. However, he noted that some sectors like aviation, hospitality, logistics and crude oil are more directly impacted by ongoing global tensions.

"There may be some slowdown in business and new loans, but BFSI is not likely to be significantly affected," he said.

On deposit mobilisation, Parekh highlighted that banks are witnessing slower growth as more individuals are investing in systematic investment plans (SIPs) of mutual funds. He noted that SIPs are attracting a large share of retail savings.

He added that this trend has helped India offset foreign portfolio outflows. "In the first four months of this year, about USD 12 billion of foreign portfolio investments have gone out... but this is being replaced by domestic investors. This is good as we should rely more on domestic savings," he said.

On artificial intelligence (AI), Parekh said its full impact on BFSI is still uncertain. "It is still work in progress. It will enhance productivity for sure, but whether it will lead to job losses or not is still unclear," he noted.

Looking ahead, he said the BFSI sector will see increased participation from both domestic and global players.

"More Indian groups are entering financial services, and there will be more investments from foreign companies as well," he said.

- ANI