Union Budget 2021 Expectations for Insurance Sector: We have not seen a Union Budget that is more eagerly awaited or has more expectations riding on it than the one coming up in 2021. The reason for this, as we all know, is the Covid-19 pandemic, which has upended, or at least delayed, the plans that one may have set out at the beginning of this financial year.
Protecting lives and livelihoods has always been a priority, and in the current situation, the government should ensure that the steps it takes and the policies it introduces continue to put the interests of the people at the forefront. Announcing a budget that balances national and individual interests will be an important step in this direction, as it will determine to an extent, how one can go about securing themselves and their families.
Life insurance has become even more relevant than before. In this context, there are some policies relevant to insurance under the existing tax regime that deserve to be relooked at in the upcoming Budget.
Tax benefits for insurance for all tax regimes
Section 115BAC of the Income Tax Act,1961 provides the option of taxation at lower slab rates. However, for that, the assessee needs to forego certain exemptions, which include deduction under Section 80C. This is not an ideal situation as one of the items that offer tax benefits under Section 80C is life insurance.
Insurance penetration in India is abysmally low currently. Until such time that the market evolves and there is a certain level of financial awareness amongst all strata of the population, it is important to retain the income tax incentive on life insurance products. The income tax benefit of life insurance has traditionally played a big role in increasing the coverage of life insurance plans
It would go a long way to make a deduction for life insurance premium available while opting for taxation under the provisions of Section 115BAC. Even if the deductions prescribed under Section 80C are not to be considered under the scheme, the Budget should consider granting deduction for a separate contribution to keep a life insurance plan in force.
Relook at GST on term, pension & annuity products
Social security measures are essential to protect people from any socio-economic strata. Term plans are recognised as the lowest cost option to offer financial security to family members and dependents especially in the case of a breadwinner’s demise. The existing GST rate of 18% on term insurance plans poses an issue in this context, and it would be better to rationalise it to a more reasonable 5%.
A tax rate reduction in term insurance plans will encourage people to buy more insurance cover. Increased subscription for term plans will, in turn, create significant investments in sectors such as infrastructure and housing. One hopes there won’t be any further restrictions on availing of input tax credit and that it continues as is.
Life insurance companies have not only increased the reach and penetration of their retiral schemes but also contributed significantly to popularising the government’s National Pension Scheme among the masses. Currently, individuals pay GST at 1.8% when they buy an annuity through pension plans from life insurance companies, whereas no GST is levied on their NPS contribution. Doing away with the GST on pension/annuity products by life insurance companies and offering income tax benefits same as that under NPS will help in driving the adoption of such products, at a much wider scale.
Protection of family members
The provisions of Section 10(10D) should be amended to align the premium-to-sum-assured ratio with the IRDA product guidelines. The amendments should exempt the entire sum received under ‘critical illness’ plans, without any condition. It would be unfair to pay tax on such illness, as the tax will reduce the funds available to the policyholder for treatment.
Complete deduction should be allowed for the principal component under the annuity plans of life insurance companies, and only the interest amount should be taxed. An additional deduction of Rs 50,000 should be granted to senior citizens at par with what they avail on their interest from bank deposits.
Budget 2021 is going to be of critical importance, and if it takes into account the right considerations, it can be a great boost in the right direction.
The writer is MD & CEO, Max Life Insurance