JOIN USIncome Tax tweaks and LIC stake sale run contrary to each other
The government’s decision to divest its stake from insurance behemoth Life Insurance Corporation of India (LIC) and its decision to introduce an alternative personal tax regime don’t go hand in hand.
A common man can avail benefits of the ‘lowered tax’ regime when they forego the exemptions and deductions currently available to them.
Among many other deductions, one of the substantial exemptions availed is for insurance: as per Section 80C of the Income Tax Act, the premium paid towards life insurance policies up to the maximum limit of Rs 1.5 lakh is eligible for tax deduction and deductions are applicable if the amount of premium paid in a financial year is 20% of the sum assured amount of the policy.
A substantial chunk of these premiums used to go to LIC – the behemoth in the life insurance business in India. As a result, all the analysts, wealth managers, and economists are of the opinion that this divestment plan, with the proposed tax regime, won’t be successful.
“People were buying insurance because of the tax break - in the long term it’s all gone now,” says Anubhav Srivastava of Infinity Alternatives. With the reduced number of policies, the valuation of LIC is also likely to be hit.
“Element of contradiction in the sense that the removal of concession in the Income Tax Act could dampen the valuation of LIC,” says M Govinda Rao, Member, 14th Finance Commission.
The balance sheet of LIC stands Rs 30.56 lakh crore – bigger than India’s budget for next year and almost four times that of the balance sheet of Reliance Industries Limited, India’s largest private company. Of the total balance sheet size, 91% or Rs 27.87 lakh crore is in the form of the policy liabilities, owned by the policyholders.
The institutional investors have long been pushing for the LIC divestment.
“It is positive because it will bring discipline and governance in LIC,” CEO at one of the top insurers told DH, wishing anonymity. The said person further said that a lot of the valuation bubble in the stock markets can be attributed to the huge flow of money coming in from the LIC and the EPFO.
New foreign funds to enter
There is also a hope that this divestment would lead to entry of more foreign funds. It is expected that they will pump in funds. The foreign fund inflow has been muted for the past couple of years.
Many believe that LIC will have more takers than other PSUs. “More foreign money will flow to just own this stock. You will see many new FIIs coming to India to participate in this stock because markets will easily digest LIC but other PSUs may find it difficult.
Extra supply can dampen markets in case of other PSUs,” said the CEO of a domestic mutual fund house who did not wish to be quoted.