Government lines up tax breaks for insurance

There could be a big cheer for India’s insurers in the national budget as the government plans to reduce service tax on premiums, protect existing policies from future tax changes, and relax rules on tax deducted at source to encourage households into buying more insurance cover.

It is also likely to propose additional tax breaks for pension products, in addition to the current Rs.1 lakh savings cap, when finance minister P. Chidambaram presents the budget for 2013-14 on 28 February.

The revenue department has accepted most of the proposals the insurance industry suggested during their meeting with Chidambaram a couple of months ago, according to a finance ministry official.

Most of the demands do not have a large revenue implication. But they will provide a huge push to the insurance sector in terms of cost savings and making administration easier, the official said, requesting anonymity. The revenue department has agreed to most of them.

These steps will be a part of the government’s efforts to funnel household savings into long-term savings instruments such as insurance and mutual funds. In September, the government held a series of discussions with life and general insurance companies and the insurance regulator to suggest steps to revive the industry.

Grandfathering of an insurance policy is important to retain the confidence of the policyholders. It should not happen that because of changes in tax laws they have to pay tax on the maturity of the insurance policy, when at the time of buying the policy there was no such tax, said Kamalji Sahay, former managing director and chief executive of Star Union Daiichi Life Insurance Co. Ltd. Creation of a separate window for insurance policies will channelize long-term funds into the insurance industry and provide a big boost to the sector.

Under section 80(C) of India’s income-tax law, investments into provident fund and insurance premiums, among others, are eligible for tax deductions up to a limit of Rs.1 lakh. The insurance industry wanted an additional relaxation to encourage purchase of long-term insurance policies. The government is looking at creation of a separate window for pension products, including the National Pension Scheme and those issued by insurance companies.

The industry had demanded a reduction in service tax on first-year regular premium as well as single premium policies, and a complete waiver in social security insurance schemes such as the Aam Admi Bima Yojana. In addition, it had asked for grandfathering of all insurance policies and relaxation in the clause that insurance companies have to deduct tax at source on payment of agent commission above Rs.20,000.

It is likely that now insurance companies will have to deduct tax deducted at source only if cumulative payments exceed a particular amount. These are small administrative issues, but will help in reducing costs for the insurance companies,said the finance ministry official.

The insurance industry was hit by large-scale changes in rules that govern unit-linked insurance plans that were brought about by the country’s Insurance Regulatory and Development Authority in September 2010. Stricter norms for pension products have also made the unit-linked pension market virtually non-existent.

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