Budget 2019: Key policy changes, tax reforms that will shape the future of NPS and insurance sector

Budget 2019 India: Here are the key aspects from the economic survey and the Union Budget and amendments proposed in the Finance (No.2) Bill 2019, as is relevant for the NPS and the insurance sector.

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Budget 2019-20: The rate of tax deduction at source is changed to 5 percent on the amount of income comprised therein from 1 percent on gross payment.

By Bahroze Kamdin and Alifya Hakim

Union Budget 2019 India: The Budget 2019 was presented in the lower house of the Indian Parliament on 5 July 2019 by the Finance Minister. As is the norm, the economic survey for the financial year 2018-19 was released a day before. The key aspects from the economic survey and the Union Budget and amendments proposed in the Finance (No.2) Bill 2019, as is relevant for the insurance and NPS sector, are discussed hereunder.


Growth in the insurance Industry as per the Economic Survey for FY 2018-19

# Insurance penetration, which was 2.71 percent in 2001, has steadily increased to 3.69 percent in 2017 (Life 2.76% and Non- Life 0.93%). The insurance density in India which was US$ 11.5 in 2001, reached US$73 in 2017 (Life-US$ 55 and Non-Life -US$ 18).

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# During fiscal 2017-18, the gross direct premium of general insurers (within India) was Rs.1,50,660 crores as against Rs.1,28,130 crores, in 2016-17, registering a 17.6 percent growth due to growth in motor, health and others segments of the insurance industry. The life insurance industry recorded a premium income of Rs 4,58,810 crores as against Rs 4,18,480 crores in the previous financial year, registering a growth of 9.64 percent.

Major Policy Initiatives

# To further open up Foreign Direct Investment (FDI) in insurance sectors in consultation with all stakeholders. Presently FDI is permitted in insurance companies up to 49 percent under the automatic route.

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# Proposed 100 percent FDI in insurance intermediaries (e.g., insurance brokers, third party administrators, surveyors and loss assessors, others)

# To organise an annual Global Investors Meet in India so that India also becomes part of the global financial system to mobilise global savings mostly institutionalised in pension, insurance and sovereign wealth funds.

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Regulatory Changes

# Section 6 of the Insurance Act, 1938 amended to facilitate on-shoring of international insurance transactions in IFSC by foreign reinsurance companies. The Net Owned Fund requirement reduced from Rs.5,000 crore to Rs.1,000 crore for opening of branches by foreign reinsurers at the International Financial Services Centre (IFSC) in GIFT city.

# Section 16 of the General Insurance Business (Nationalisation) Act, 1972 has been amended pursuant to which the number of nationalised general insurance companies can be reduced to four or less (excluding GIC) by the central government (CG) by way of restructuring. Presently such companies cannot be reduced below four. There are presently five public sector general insurance companies (excluding GIC), so the need for the amendment in law to carry out any restructuring or merger of such companies.

Major Tax Reforms

# Amendment in Section 194DA of the Income-tax Act, 1961 (the Act) – Tax to be withheld on the income component paid to resident under a life insurance policy, which is not exempt under sub-section 10(10D) of the Act. The rate of tax deduction at source is changed to 5 percent on the amount of income comprised therein from 1 percent on gross payment. Indirectly, the Finance Minister has accepted that the premium paid should be allowed as a deduction while computing the income taxable under the life insurance policy. The amendment is effective from 1 September 2019.

# Can this intent be extrapolated to annuity policies so that the premium paid on annuity be reduced while computing income from annuity?

# Section 269SU inserted to provide that companies whose turnover exceeds Rs 50 crore in the preceding year should provide facility to accept payments through prescribed electronic modes. Failure to attract penalty @Rs.500 per day. Amendment is effective from 1 November 2019.

Expectation of general insurance companies inter alia included (1) clarity for deduction of reinsurance premium paid to foreign reinsurance companies and (2) lower rate of tax on capital gains under section 112A of the Act, is pending.

National Pension Scheme

Number of Subscribers and AUM as on 31st May 2019 – Atal Pension Yojana (APY)

Number of Subscribers and AUM as on 31st May 2019 – Atal Pension Yojana (APY)

Major Policy Initiatives

# 30 lakh workers have joined the Pradhan Mantri Shram Yogi Maandhan scheme launched on 5th March, 2019. The scheme aims at providing INR 3,000 per month as pension on attaining the age of 60 years in unorganised and informal sectors.

# For extending the pension benefit, three crore retail traders and small shopkeepers whose annual turnover is less than Rs 1.5 crore will be covered under a new scheme, namely Pradhan Mantri Karam Yogi Maandhan Scheme.

# Appropriate organisational structure to be created to separate the NPS Trust from Pension Fund Regulatory and Development Authority (PFRDA) to maintain arms’ length relationship.

# Efforts are being made to attract institutional investors (pension funds, sovereign wealth funds etc.) into infrastructure financing.

Major Tax Reforms – Incentives to National Pension System (NPS) subscribers

# Section 10(12A) – Increased the limit of exemption from current 40 percent to 60 percent of payment on final withdrawal from NPS

# Section 80CCD – Allows deduction for employer’s contribution up to 14 percent of salary from current 10 percent, in case of central government employees.

{Employers contribution to NPS is taxable under section 17 of the Act and deduction is allowed under section 80CCD of the Act}

# Section 80C – Allows deduction for contributions made to Tier II NPS account by central government employees (within the overall limit of Rs.150,000).

These amendments are effective from AY 2020-21, i.e. for financial year 1 April 2019 to 31 March 2020. However, the Union Cabinet had approved of this exemption in its meeting on 6 December 2018. So this exemption should have been applicable for the AY 2019-20 onwards.

The insurance and the NPS sectors have grown over the years. More such policy initiatives and tax reforms should help the growth of the sectors and also benefit the investors in these sectors.

(Bahroze Kamdin is Partner with Deloitte India, and Alifya Hakim is Senior Manager with Deloitte Haskins and Sells LLP)

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