The decision to allow 100% foreign direct investment (FDI) in the insurance sector may not significantly alter competition dynamics, according to HDFC Life’s MD and CEO, Vibha Padalkar.

While the move could attract foreign insurers or investors seeking full control, past FDI increases did not result in substantial capital inflows.

The key factor, the CEO noted, is regulatory certainty, which plays a crucial role in attracting investments—not just in insurance but across sectors. A stable regulatory outlook, rather than FDI limits alone, is what truly shapes investor confidence and market participation.

Finance Minister Nirmala Sitharaman’s Budget 2025 increased the FDI in the insurance sector from 74% to 100%.

Shares of major listed insurance companies such as HDFC Life, SBI Life, and ICICI Prudential Life fell by up to 6% following the announcement.

The company, which has a current market capitalisation of ₹1,34,464.06 crore, has seen its shares gain more than 6% over the last year.

These are the edited excerpts of the interview.

Q: Since there will be some kind of leeway given, particularly on the new structure, the fear is that it could result in fewer people taking insurance, and in that regard hitting your volumes. What do you have to say with regards to that?

A: Couple of points here – the first point is, it is widely available data that almost 70% of taxpayers have moved to the new tax regime. That is the first data point. Second data point is with our own policy holders, our analysis shows that less than 2% are dependent on tax or tax being a reason for them possibly buying life insurance. So a non-material number, and even that would reduce as we go along. So, we have moved a long way from tax being the reason.

This might have been certainly the case a decade ago, but now, given innovation in the sector and many other products, and emphasis on more and more of protection – at least certainly for HDFC Life, but even broader for the sector, just given the number of people who moved away into the new tax regime, I don’t think that is a damper in any form or shape.

Q: You are saying that 80C roughly contributes about 2% of the new individual premium. That is what you are saying?

A: 80C is overcrowded. There are many things. And if you are salaried, in all probability, when we do an income proxy, we know that even if they did not buy life insurance, their contribution to Provident Fund, other things, Equity Linked Saving Schemes (ELSS) and so on, would have consumed or utilised 80C anyway. So that was not the primary reason, or the reason at all, for them buying life insurance.

Q: The other change was this redemption of unit link schemes, right? And for a brief period, there was a little bit of fear that maybe it is being taxed at capital gains but then it was told that it was being added to your income tax charged at the marginal rate. Now, it is going to be taxed at 12.5%, which is the capital against tax. Is that the correct interpretation?

A: Yes and significantly better. So let me just deconstruct somewhat of a misunderstanding in terms of what was intended. First of all, the language – I am just referring to the language mentioned by the FM – is bringing clarity in income on redemption. So it was to bring clarity and not to introduce anything new, anything that was significantly adverse.

Now post February 1, 2021 there was a cap of ₹2,50,000 and anything above ₹2,50,000 annual premium was taxed, and it was taxed and continues to be taxed as capital gains tax. Up to ₹2,50,000 was tax free.

The policies that were sold before February 1, 2021, if they adhere to certain conditions, for example, number of times of the ratio of premium to sum assured, then it was completely tax free, regardless of the quantum. However, there were some other policies that didn’t satisfy this multiple of sum assured and they were being then taxed and continuing to be taxed until today at the highest marginal tax rate.

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So all that the provisions now unveiled are going to do is to simplify it, to say that anything that is not compliant will now be taxed under capital gains tax, instead of all this hybrid of earlier was the marginal tax rate and so on.

If you add on that, if you were to look at – hypothetically – if I had bought a policy before February 2021 and had only a six times sum assured, then that would have not been even eligible for under Section 10D. So I would have been paying at highest marginal tax rate. So if a taxpayer has been paying, or would have paid a maturity proceeds at 30% tax, now it will be at a capital gains tax rate at 12.5% tax. So, there is a benefit for those policy holders that would have bought their policies before 2021.

Q: The third important announcement from the insurance sector is opening up the sector to 100% foreign direct investment (FDI). Will it impact listed players like you? And how does this change the competitive dynamics with some of the unlisted players now get that 100% FDI and therefore become a lot more competitive and aggressive?

A: While I welcome 100% in insurance, being pragmatic, even when it went up to 74%, it is not like there was a lot of money flow. What could happen is there could be some foreign insurers or foreign investors for whom it is either 100% or it is zero. It could attract people like that, or if they want full control and don’t want a partner – if their brand presence as an insurer somewhere else is extremely strong.

But barring that, will it make a huge change in dynamic to the competitive intensity? I don’t think so. What is important is some sort of regulatory certainty. That is the biggest aspect that will attract flows into the any sector, and that is what could be a game changer in terms of certainty on regulatory outlook.

For the full interview, watch the accompanying video

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