Insurance likely to get further sops in Budget

Buying insurance policies could become more attractive from next fiscal, with the government poring over various options to boost the sector, which has been trailing other financial services like banking.

One of the proposals before the finance ministry is to allow premium paid on certain insurance products to be allowed as a deduction from the taxable income of investors over and above the R1 lakh investment-linked deduction currently allowed under Section 80 C of the Income Tax Act.

A plan to carve out a special window for investments in insurance alone is under consideration. Currently, insurance is only one of the many options for availing of the benefit under Section 80C. An announcement is likely in Budget 2013-14.

Finance minister P Chidambaram has been vocal about the need to push savings in financial form rather than in unproductive assets like gold. The spurt in import of gold has aggravated the nation’s current account deficit.

Currently, Section 80C allows deduction of payments on life insurance premia, LIC annuity plans, subscription to certain mutual funds, pension funds and notified government securities, tuition fee and repayment of loans taken for the purchase of residential property. Premia paid on insurance products cannot exceed 10% of the capital sum assured for the purpose of deduction from April 1, 2013, onwards, as per an amendment to the law made last year.

About half of the country’s domestic savings are in financial assets, while the rest are in land holdings and other assets such as gold.

Chidambaram had asked his officials if contribution made to post-retirement medical schemes offered by insurance companies could also be allowed as a deduction. The minister recently said at a public function that mis-selling and complexity of products have been stumbling blocks in the growth of this segment of the financial services market. The minister had also said that with a reach of less than 4% of gross domestic product (GDP), India was one of most under-insured nations.

Reflecting Chidambaram’s thinking, the finance ministry on December 24 exempted two insurance schemes meant for the rural landless households and the poor (Aam Aadmi Bima Yojana and Janashree Bima Yojana respectively) from the 12% service tax to make these schemes more attractive.

There is no doubt that tax breaks could help in improving the reach of insurance products, particularly when insurers can no longer offer guaranteed returns, said Mukesh Butani, chairman and managing partner, BMR Legal.

The basic objective of insurance is risk coverage. Except for the new generation, people do not see as much value in risk coverage as they do in a more tangible form of investment such as land or gold, said Ernst & Young tax partner Prashant Khatore.

Recommendations from experts and a Parliamentary panel to raise the personal income tax exemption limit to Rs 3 lakh from the current Rs 2 lakh is also under consideration, although the current limit is in line with the structure proposed in the Direct Tax Code. If accepted, this proposal could help boost consumption in the economy and make taxation more fair to under 10% of the 120 crore people who pay taxes.

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