Tax relief spells bad news for insurance sector

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While the Budget has cheered up individual taxpayers by hiking the basic exemption limit, it could spell bad news for the insurance sector.

Many people, who earlier fell marginally into the tax net and were forced to buy life and health insurance policies to save tax, may now opt not to take fresh policies. Others who would have bought insurance policies, had there been no change or a decrease in the exemption limit, might decide to put their savings elsewhere.

The insurance penetration as a percentage of the country’s GDP is only 4.8%, of which life insurance and non-life insurance comprises 4.1% and 0.6% respectively.

The Budget increased the taxable income from Rs 1.1 lakh to Rs 1.5 lakh. For women, the basic exemption limit has been increased from Rs 1.45 lakh to Rs 1.8 lakh, while for senior citizens it has gone up from Rs 1.95 lakh to Rs 2.25 lakh.

Vikas Vasal, executive director (personal tax), KPMG, said, “Since, unfortunately insurance is primarily sold as a tax saving device, some might not choose insurance to invest their savings. But this will have only a minor impact.”

“However, this mindset (of selling insurance policies as a tax saving device) has to change. Insurance sellers have to target youngsters by informing them that insurance products are an essential and excellent financial cover in case of health problems, death, disabilities and other uncertainties. There are insurance products which are coupled with investment options giving very good returns,” he added.

Kshitij Jain, MD & CEO, ING Vysya Life Insurance said there will not be any fall in the number of people buying insurance products as incomes are growing at a faster rate. “What does not change is the fact that the maturity amount is still tax free, unlike in other financial products.”

The Budget has allowed an additional deduction of Rs 15,000 for medical insurance premium paid for a parent. The deduction goes up to Rs 20,000 if the parent is a senior citizen. Also the budget has done away with the earlier mandatory condition that the parent has to be a dependent on the assessee.

Sandeep Bakhshi, MD & CEO, ICICI Lombard General Insurance welcomed this saying it emphasises the senior citizens’ health insurance and is positive for the health insurance sector's growth.