In order to develop a ‘pension society’ in India, finance minister Arun Jaitley in its third Budget speech announced reduction in service tax levied on annuities of insurance plans. Though insurance companies have by and large welcomed this move, they also feel that the current single annuity market is very small and will take many years to make it successful.
In the Union Budget 2016-17, it was announced that, to reduce service tax on single premium annuity (Insurance) Policies from 3.5% to 1.4% of the premium paid in certain cases with effect from April 1, 2016.
Typically, single-premium annuity plans help an investor earn a regular income for the entire life. In single-premium plans, investors pay a lump sum premium, and opt for a suitable annuity option that suits their requirements – it could be monthly, quarterly or yearly. Based on the opted annuity option and selected payout frequency, investors start receiving regular annuity income.
R M Vishakha, MD and CEO at IndiaFirst Life Insurance, says: “I think it is a very positive move, as annuities are primarily purchased by the retired people on the overall savings they have accumulated. As of now, the single-premium annuities market is not very large, but after maturities of National Pension Scheme (NPS) and superannuation schemes, it will be become very big.”
Currently only a few life insurance companies provide single-premium annuities, and typically the minimum entry age in such category is 40 years. “Despite reduction in the service tax, I don’t think single-premium annuity policies are likely to see demand because returns are very less compared to other debt products,” said senior official of leading insurance company. Currently investors earn anywhere in the range of 5-7% in single-premium annuity policies.
Not surprisingly, annuity products do not account for a high proportion of the insurance business. In FY15, a little over 17% of the total investment made by insurance companies in India was on account of annuities compared with 16% for unit-linked funds and 67% for life funds — the last two products are tax-free.
The finance minister, in his Budget speech, proposed that 40% of the withdrawals of the employees provident fund, NPS and other superannuation corpus will be exempt from tax, while investors need to buy annuities from the remaining 60%.
“Reduction in service tax will give more money into the hand of investors and I think it’s a fair move to develop the annuities market in India,” says Gaurav Mashruwala, a certified financial planner (CFP).
According to the insurance players, despite single annuities market being small, state-run Life Corporation of India (LIC) is the biggest player in the segment and a reduction in service tax will help LIC to target more and more investors. LIC offers a monthly annuity of Rs 745 on a payment of Rs 1 lakh if bought at the age of 60 with no payments to be made after the subscriber’s death. In case the payment has to be extended to the spouse, this monthly annuity reduces to Rs 644.
There was a slew of announcements made for the insurance sector in the Budget 2016-17. These include allowing general insurance companies to list on stock exchanges to launching a new health protection scheme, which will provide health cover. The finance minister also announced that foreign investment will be allowed in the insurance and pension sectors in the automatic route up to 49%.
Insurers feel that the announcements made in this year’s Budget are small steps that can lead to big development in a few years.