Effective tax rate to rise for life insurance companies with DDT removal

Dividend income holds a significant share in the profit before tax of a life insurance company, of 24-37 per cent in 2018-19, it is estimated

The proposal in the Union Budget to tax dividend income in the hands of the recipient will raise the effective rate for life insurance companies, impacting their embedded value (EV) and value of new business margins.
 
Hitherto, they get a tax benefit on dividend income received on a policy holder’s investments. As a result, their effective tax rate was lower than the 14 per cent corporate tax. With dividend income no longer tax-exempt, product margins will get impacted and EV will take a one-time hit, observes a note by brokerage Jefferies.
 
Dividend income holds a significant share in