Why Did Insurance Company Stocks Fall As Much As 13% Post Budget?

Stocks of insurance companies made sharp declines of up to 10 percent on Saturday after the presentation of Union Budget 2019-20. At closing time, shares of ICICI Prudential Life were down by 13.14 percent, SBI Life Insurance by 7.78 percent, HDFC Life by 4.90 percent and GIC by 2.91 percent.

These stocks slumped after the Finance Minister Nirmala Sitharaman did not announce any tax exemption on insurance policies. In fact, the new tax regime for FY21 will tax away the existing exemption on these plans.

At the Union Budget, FM announced a simplified yet optional tax regime "wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions."

The proposed tax structure:

Taxable Income Slab (Rs)	Existing Tax Rates	New Tax Rates
0-2.5 Lakh	Exempt	Exempt
2.5-5 Lakh	5%	5%
5-7.5 Lakh	20%	10%
7.5-10 Lakh	20%	15%
10-12.5 Lakh	30%	20%
12.5-15 Lakh	30%	25%
Above 15 Lakh	30%	30%

If the taxpayer foregoes tax exemption, including those that come with payments towards insurance premiums, they will be able to benefit from the simplified regime that the government hopes to make it easier for individuals to comply with without professional help.

The Budget speech explains how an individual can benefit from the new tax regime in comparison to availing exemptions- "In the new tax regime, substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him. For example, a person earning Rs 15 lakh in a year and not availing any deductions etc. will pay only Rs 1,95,000 as compared to Rs 2,73,000 in the old regime. Thus his tax burden shall be reduced by Rs 78,000 in the new regime. He would still be the gainer in the new regime even if he was taking deduction of Rs 1.5 Lakh under various sections of Chapter- VI-A of the Income Tax Act under the old regime."

The new regime reduces the appeal of insurance policies.

Meanwhile, general insurance companies were expecting enhancement under Section 80D for home insurance, personal accident insurance along with health insurance schemes, but were left disappointed.