Around the world insurance premium has been attracting some tax relief as a measure of incentive to the general public to voluntarily provide for risk cover on their life, health or property. The insurance proceeds, too mostly enjoy exemption from tax as it is a fund meant to mitigate hardship caused due to some unexpected event causing financial loss to individuals or families.
Tax immunity is also offered to savings under life insurance plans subject to certain conditions as mostly they are intended to meet certain unavoidable individual or social obligations. In the United States, however, premium on personal life insurance is not deductible from taxable income as it is treated as a personal expense, but in most of the situations death claim proceeds are tax-free. Maturity proceeds and policy loans are also taxed there.
Tax rules vis-à-vis insurance are more complicated. In the United Kingdom, policy proceeds are usually not taxed but inheritance tax can be a big charge on the death claim amount. The death claim proceeds are treated as part of the deceased’s estate and taxed accordingly. Fortunately in India the Estate Duty stands abolished since 1985 and the claimants are able to enjoy the full value of the death claim proceeds. In the UK there is a provision of receiving the amount through a trust formed by the life assured during his lifetime. The trust money is not subjected to income tax or estate duty.
Till the imposition of service tax on life and non-life insurance premium few years back in India, there was no tax on insurance premium. Now service tax is payable ab-initio along with premium which helps the government mop up substantial amount from the industry. During the current year service tax collection from the insurance industry is expected to rise substantially with handsome growth in non-life premium and positive growth in life insurance premium, too, though LIC’s collection so far has not been very encouraging.
For the FY 15-16, the service tax rate is higher than the previous year and coupled with the Swachh Bharat levy the taxes on non-life insurance premium are as much as 14.5%. In UK, the ab initio tax on insurance is known as Insurance Premium Tax. As insurance premium was not subjected to VAT, IPT was introduced in 1994. There the highest revenue is collected from motor insurance IPT which is levied at the rate of 9.5%.
The service tax on insurance premium has substantially increased the cost of insurance in India and I understand that this is an important reason for the people in the middle and lower segment of society to avoid buying insurance.
Recently, there was news report that a person buying LIC’s annuity policy returned the same during the cooling off period when he found that substantial amount from his deposit had been charged to service tax leading to reduction in the annuity amount per month.
During the run-up to the Union Budget, generally the discussion hovers around increasing the limit of Section 80 C deductions in respect of insurance premium or for allowing a separate deduction only for insurance premium up to one lakh or so.
Currently, insurance premium is clubbed with NSC, PPF, ELSS, 5-year tax saving deposit, etc. But I believe to enhance insurance penetration the cost of insurance needs to come down and the government must be ready to sacrifice some of its revenue initially to make the insurance products more affordable. There is a need to review application of service tax on insurance. Insurance is not a service that is consumed with the transaction of one instalment of premium. Life insurance is a long term contract and people view this as a saving instrument. Hence every rupee deposited matters.
But if a certain portion of that amount does not flow into deposit the return naturally gets badly reduced. If there is no service tax on fixed deposit or on amount that goes into provident fund why should there be service tax on Endowment insurance premium.
Service tax on householder policy, health and motor insurance policy also should be charged at a much lower rate to make the premium attractive. The government must consider this issue with open mind and give a boost to the insurance business in India by helping the industry to sell products at affordable rate. Service tax is definitely looked upon as a burden in the transaction between the prospective policyholder and the insurer.
On the other hand I would recommend restoration of the benefit of section 10(10D) to the Key Man Policy that the insurers sell to corporates to cover the life of key professionals in their organisations.
With more start-ups and more manufacturers in India in the wake of resurgence in economy, the government must provide enough protections to corporates and to their honchos. The key–man policy fulfils this requirement. This will also enable insurers garner lump sum premium from the corporate sector which ultimately goes back to the capital market as investment by the insurers.
I think the insurance industry needs to be incentivised through rationalisation of the tax structure in the next budget so that the industry regains its growth momentum.
The writer is former MD & CEO of SUD Life