From someone in the top tax bracket to the lower income groups with earnings below the taxable limit, insurance is crucial for all without exception. While the wishlist of insurance buyers hovers around affordability, there are quite a few other nice-to-have’s expected out of the upcoming Union Budget 2016 from all those who seek insurance as a long term investment option for a better and secure future.
If the announcement of relaxed FDI norms for the insurance sector was the anxiously awaited announcement last year, insurance buyers hope for better tax sops this time around. Here is a look at some of the popular but pragmatic expectations that can boost consumer interest in the insurance and pension funds sectors.
Wish 1: Exemption of service tax from premiums and maturity With service tax hovering at 14.5% post last year’s Budget, it increases the overall cost of insurance premiums. With hiking medical costs, it is further expected to increase insurance premiums very soon. Industry experts feel that unlike other service areas where a consumer seeks service, insurance premium does not offer a regular service and hence service tax exemption should be on offer for insurance buyers.
Many also feel that unlike mutual fund investments where you pay a service tax only on the management fee and the advisory fee, taxing the full insurance premium for insurance is uncalled for. This will not only make insurance more affordable for the common man, but will also boost sales, given its tax sops, awareness, and affordability.
While service tax brings in revenue for the government, increasing cost of ownership of insurance products in a country where insurance penetration levels are low may dampen overall sales, and by corollary dampen service tax collections for the government. Thus, this needs a closer look.
Wish 2: Tax on insurance policy returns to be rolled back The biggest drawback of investing in insurance as a financial instrument is the taxation on maturity returns. Unless there is a claim involved, insurance returns are taxable in India, and companies pay out the maturity amount after deducting TDS. The taxation component did not hurt the common man when the markets were booming and the insurance products were generating decent returns.
However, with the current sluggish market and lower returns, the taxation on maturity is now hurting the common man. There is a case for making short term insurance plans tax-free on returns much like long term mutual funds.
Wish 3: Tax exemption of pension funds on maturity India apparently does not have much on its shelf to promote pension products. The government offers tax sops for investment in pension products like NPS, but on the other hand the maturity proceeds are taxable, dulling the shine from the investment. Suggestions made by sector stakeholders to the Finance Minister include an age cap on pension withdrawals and taxation, which would translate to applicability of taxation only if investors withdraw money from pension funds before a certain age limit and tax-free after that limit.
Income tax on both annuity and pension payouts has been the reason why NPS has failed to attract as many investors as expected last year. Hopefully, this Budget session will cater to these wishes and adopt a tax exemption policy on maturity for pension funds.
Wish 4: Separate deduction limit for life insurance There is a need for having a dedicated tax limit for various long term savings products rather than having a single limit as applicable today under Section 80C. Industry experts have advocated a separate limit for life insurance as well as for other long term instruments like pension products. The tax exemption on these products should not be clubbed with the current tax limits and a dedicated tax limit will augur well for the insurance sector as a whole.
Wish 5: Linking of tax relief to policy term Currently, insurance policies other than pension plans are eligible for tax deductions under Section 80C and Section 10 (10D) only if the cover offered is 10 times the annual premium. Insurance experts have been advocating a change where the tax relief is linked to policy tenure rather than on the sum assured.
This will mean an average person will buy insurance as per his need and not unnecessarily opt for a high premium policy increasing the chances of a possible default mid-tenure. This will also encourage long-term investments in insurance, which will be beneficial both for the buyers as well as for the industry as a whole.
In sum, insurance buyers are optimistic that the government will consider all active proposals and offer them relaxed taxation norms promoting investment in both long- and short-term insurance.
(Author Adhil Shetty is CEO, BankBazaar.com. Views expressed here are personal and not that of CNN-IBN or IBNLive)
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