Reduction in TDS for life insurance payouts draws mixed reactions

TDS will be reduced from current rate of 5% to 2% from October 1

The reduction of Tax Deduction at Source (TDS) for life insurance payouts has sparked mixed reactions within the industry, with some players anticipating that the change could lead to increased policy sales, while others are uncertain about its overall impact.

In the Union Budget for 2024-25, a reduction in TDS from 5 per cent to 2 per cent on life insurance payouts has been proposed, with effect from October 1, 2024.

Experts believe that this reduction will increase the net payouts for policyholders, improving their cash flow. This could potentially boost insurance policy sales.

According to analysts at HDFC Securities, the lowering of TDS rates will increase the attractiveness of life insurance policies.

“For life insurance companies, this change contributes positively to the overall customer experience. By providing higher net payouts, insurers can foster greater trust and satisfaction among their clients, which is essential for building long-term relationships,” said Manish Pahwa, chief compliance officer, Future Generali India Life Insurance.

“This enhanced customer experience can lead to increased retention rates and referrals, ultimately driving growth in the sector. Additionally, the more favourable payout structure is likely to stimulate demand for life insurance products, encouraging more individuals to buy life insurance policies,” he added.

Having said that, some life insurers see the tax reduction as advantageous for policyholders but expect it to have little effect on their business operations.

“We do not anticipate any material change in business due to the rationalisation of TDS (payout for policyholders), as it is primarily operational in nature,” said Niraj Shah, executive director and chief financial officer, HDFC Life.

“It benefits the policyholder or recipient of the policy payout by temporarily increasing their cash flow,” he said.