The COVID-19 pandemic has made people, businesses and governments around the world assess their priorities and think about how to revitalize keeping the citizen’s interests in mind. If anything, the pandemic has highlighted the need to build the resilience of people and to place their concerns at the centre stage of policy discussions. Budget 2021 is going to be of critical importance and if it takes into account the right considerations, can be a great boost in the right direction.
Life insurance has become even more relevant than before. In this context, there are some policies relevant to insurance under the existing tax regime that deserve to be relooked at in the upcoming budget.
1. Tax benefits are essential to aid insurance adoption
Insurance penetration in India is abysmal currently. Until the market evolves and finds a certain level of financial awareness among the larger population, it is extremely important to retain the income tax incentive on life insurance products. Traditionally, the income tax benefit of life insurance has playeda big role and continues to be instrumental in increasing the coverage of life insurance plans.
The option of taxation at lower slab rates is provided underSection 115BAC of the Income Tax Act,1961. However, for that, the assessee needs to let go of certain exemptions, which include deduction under section 80C of the Income Tax Act,1961. This is not the best situation because life insurance isone of the items that offer tax benefits under section 80C of the Income Tax Act,1961.
It would therefore be worthwhile to allow a deduction for life insurance premium available while opting for taxation under the provisions of Section 115BAC of the Income Tax Act,1961. Even if the deductions prescribed under section 80C of the Income Tax Act,1961 are not to be considered under the scheme, the budget should consider granting deduction for a separate contribution to keep a life insurance plan going.
2. A relook at taxation on term insurance, pension, and annuity products can go a long way
Social security measures are essential to protect people in financially challenging situations such as a pandemic. Announcing measures that balance individual interests will determine the extent to which one can go about securing themselves and their families amidst these times of uncertainty.
Furthermore, term plans are recognized as the most cost-effective options to ensure the financial security of dependents especially in the case of a breadwinner’s demise. A tax rate reduction in term insurance plans has the potential to encourage people to buy more insurance cover. Increased subscription for term plans will, in turn, give impetus to investments in sectors such as infrastructure and housing. For it to yield positive outcomes, it is important to ensure that there are no further restrictions concerning availing of an input tax credit.
Over the years, life insurance companies have not only increased the reach and penetration of their retiral schemes but also contributed significantly to popularizing the Government’s National Pension Scheme among the masses. Doing away with the GST on pension/annuity products by life insurance companies and offering income tax benefits compared to those with the government’s NPS scheme will help in driving the adoption of such products, at a much wider scale.
3. Empowering Indians to protect their loved ones
To ensure that policyholders do not suffer due to any mismatch, the provisions of Section 10(10D) of the Income Tax Act,1961should be amended to align the premium-to-sum-assured ratio with the IRDA product guidelines. The amendments should also exempt the entire sum received under ‘critical illness’ plans, given the current scenario where there is heightened insecuritywith regards to health and medicare. Paying tax on such illnesses will reduce the funds available to the policyholder for treatment.
And lastly, the complete deduction should be allowed for the principal component under the annuity plans of life insurance companies, and only the interest amount should be taxed. An additional deduction of Rs. 50,000 should be granted to senior citizens at par with what they avail on their interest from bank deposits.
We also look forward to an increase in the FDI limit from the current 49% to 74%, in the near term. The Indian private life insurance industry has been in force for about 20 years and given its significant contribution to the financial growth of the economy, it is a sector poised for deeper investments. Increasing the FDI limit can help strengthen the overall infrastructure, boost technology and innovation and bring in best practices to the industry.
By addressing the important contours relevant to life insurance, the upcoming budget can continue to put the interests of the people at the forefront and help restore the financial resilience of citizens, effectively.
The author of the article of Prashant Tripathy, MD&CEO of Max Life Insurance