Shares of Life Insurance Corporation of India (LIC) and HDFC Life slipped between 9% and 12% after Finance Minister Nirmala Sitharaman reduced the tax exemption limit on high-value insurance policies.

"It is proposed to provide that where aggregate of premium for life insurance policies (other than ULIP) issued on or after 1st April, 2023 is above ₹5 lakh, income from only those policies with aggregate premium up to ₹5 lakh shall be exempt," the finance minister said in her Budget speech.

The move will not affect the tax exemption provided to the amount received on the death of an insured person, Sitharaman said, adding it will also not affect insurance policies issued till March 31, 2023.

Reacting to the development, shares of state-run LIC tanked as much as 10% to ₹588 apiece on the National Stock Exchange (NSE). HDFC Life too fell as much as 12% to ₹504 on the NSE.

The slide in shares of life insurers comes at a time when the government is pitching the new tax regime — where tax deductions are not allowed — as the "default" regime. "The new tax regime for Individual and HUF, introduced by the Finance Act 2020, is now proposed to be the default regime," the Budget document reads.

However, citizens will continue to have the option to avail the benefit of the old tax regime, the finance minister says.

Demand for life insurance remains buoyant as a result of the consumer awareness of these products which had increased during the coronavirus pandemic, according to a report by Moody's. During the first eight months of 2022, life insurers' new business premiums were up 34%.

"For life insurers, total claims increased by 26% year on year in FY 2021, reflecting the continued impact of the coronavirus pandemic claims through FY 2021, which ended in March 2022. Although industry data has not yet been published for FY 2022, we expect life insurance claims to have declined to more normalised levels, as covid-related mortality has receded," the ratings agency said in a report last month.

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