Official sources told FE that in the Budgetary recommendations to the department of revenue, the department of financial services (DFS) has mooted the removal of service tax on micro-insurance, reduction of the service tax burden on life insurance premium, increasing the deduction limit to senior citizens and individuals for health insurance as well as a separate deduction limit of Rs 1 lakh under the Income Tax Act (I-T Act) for insurance premium.
At present, investments in insurance premium are included in the consolidated deductions under Section 80C (of I-T Act) for which the limit is Rs 1 lakh. Apart from insurance premium, the Rs 1-lakh limit includes investments in mutual funds, public provident fund and small savings among other things.
Pointing out that insurance is product that has to be sold and therefore a push product and not one which is bought and thereby called a pull product, the DFS has said that only a major incentive by way of a separate deduction limit will help in increasing insurance penetration in the country.
Insurance penetration had declined to 3.96% of gross domestic product in 2012 from 4.1% in 2011. The life insurance penetration as a percentage of GDP slipped to a paltry 3.17% in 2012 from 3.4% in 2011, while non-life insurance penetration increased marginally from a minuscule 0.7% in 2011 to 0.78% in 2012.
The DFS also suggested a reduction of service tax on the gross premium of life insurance policies.
From April 1, 2012, the service tax to be paid in the first year on the amount of gross premium of life insurance policies is 3% and 1.5% for the subsequent years (Prior to that it was 1.5% for the first and subsequent years).
The DFS has recommended a flat service tax of 3% for only in the first year and sought the removal of the 1.5% service tax in the subsequent years saying this is an additional burden and therefore a disincentive.
Life insurers can now avail the concessional rate in composite policies where the policyholder is not given the break-up of risk and investment components. However, where the policyholder pays the gross premium just for the risk-cover in life insurance, then normal rate of service tax 12.36%- is levied.
The third suggestion is to do away with the service tax (12.36% including education cess) on micro-insurance products to take forward the financial inclusion programme and increase insurance penetration especially among the rural and urban poor. A micro-insurance policy is a life or general insurance policy where the sum assured is Rs 50,000 or less. On health insurance, currently while an individual can avail a maximum deduction of Rs 15,000 (including for the assessee, spouse and children) under Section 80D (of the I-T Act), for senior citizens the permissible benefit is Rs 20,000.
An additional deduction of Rs 15,000 can be availed by an individual for premium paid for parents (the limit is Rs 20,000 if either of the parents are senior citizens or both are senior citizens). The DFS has suggested that the deduction limit be increased to Rs 50,000 for individuals (including the premium paid for spouse, children and parents whether or not they are senior citizens/dependents) and for senior citizens the limit be hiked to Rs 40,000.