fe Run-up to Budget 2008

Separate exemption cap on long-term savings likely

Mahua Venkatesh
Posted online: 06-FEB-2008 14:16

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New Delhi, Feb 5: The government is considering a proposal to provide a separate exemption limit for long-term savings instruments, such as life insurance and pension schemes, over the existing deduction cap of Rs 1 lakh allowed under Section 80C of the Income-Tax Act. The proposed move will encourage individuals to invest in long-term savings instruments, as they will get a larger tax deduction.

At present, investment instruments, which come in the Section 80C net, include the National Savings Certificate, provident fund, public provident fund, life insurance premium, pension plans, infrastructure bonds and equity-linked savings schemes of mutual funds.

The insurance and pension sectors feel the government must increase tax benefits for individuals on long-term savings instruments. “If additional benefits are not provided to people for investing in long-term savings instruments, typically a life insurance or a pension product, they would naturally prefer to park their funds with other lucrative options like the mutual fund, which promise to give them quicker and richer returns,” an industry analyst said. Moreover, these two sectors provide social security and retirement benefits as well.

The dwindling savings amount of the salaried class has become a cause for concern for the government. “Life insurance and pensions are the only two segments of financial services that address the needs of individuals in the long term. Hence, the government should look at encouraging people to save for a long term by providing a separate limit for long-term savings,” Bert Paterson, CEO and managing director, Aviva Life Insurance, said.

In countries like UK and Ireland, tax incentives are provided to individuals to invest in long-term savings instruments.

Paterson also pointed out that the salaried section would be hit badly because the corpus on retirement would be insufficient, as, at present, most people are investing only Rs 1 lakh in both long-term and short-term saving instruments.

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Pvt Players begging for sopsby Dr.Gokul Kishore on 06-02-2008

It is not ironical that demand for separate exemption limit for long-term savings like insurance comes not from salaried class but from the private insurance companies. Unable to penetrate or compete PSU behemoths and not able to push FDI ceiling, private insurance players have taken the 'cause of salaried class' now. Service delivery in terms of prompt settlement will be acid test in years to come and given the U.S. experiences, better service will be at an exorbitant premium which the middle-class Indian will hardly be able to cough up. Let there not be a separate exemption for long-term savings but an overall increase without any discrimination as to product as consumer is the king in a market and he can decide which one is better.

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Separate exemption cap on long-term savings likely