Budget 2017: Annuities sold by insurers should get better tax treatment

G MuralidharThe upcoming Union Budget is a unique and significant one, being set in the backdrop of demonetization (a landmark reform which will transform the financial sector in the long term), interest rates close to bottom, and election of Donald Trump whose policies are being closely observed by the world and particularly India.This Budget is expected to focus on the key themes of growth, consumption, efficiency through cost reduction, and improving tax to GDP ratio through better tax administration and tax compliance. A renewed focus is expected to be placed on agricultural sector in line with the objective of doubling of farmers’ income in the medium term. We can also expect administrative reforms in keeping with the vision of this government to achieve “minimum government and maximum governance”. Universal basic income may be evaluated for targeted delivery of subsidy. On the whole, the Budget should aim at improving tax compliance and continuing fiscal consolidation.Life insurance is the second most preferred investment avenue for long term savings in households next only to bank deposits. Approximately, 19% of net additional household financial savings for FY16 were in life insurance. Life insurance sector plays a major role in nation building. The industry is an important contributor to infrastructure investments and GOI securities. To make life insurance industry more effectual and to create parity with other similar products, certain definite steps need to be taken for its growth and development.Sum assured: The requirement of sum assured being at least ten times of annual premium in order for the proceeds to be exempt under Section 10(10D), needs to be done away with. The decision must be left to customers rather than enforcing high cover. Further, Section 80D limit should be increased to Rs.50,000 to encourage medical insurance cover.Pension products: Tax treatment of pension products of life insurance companies should be at par with similar products offered on other platforms. Tax treatment should be based on nature and objective of the product rather than the platform, which will ensure a level playing field. Premium paid upto Rs.50,000 for a pension policy from a life insurance company should be treated at par with NPS by providing for an additional deduction under Section 80CCD(1B) and further additional deduction under Section 80CCC to the extent of 10% of salary. Life insurance pension policy should be treated as a capital asset and only the gain should be taxed on maturity or surrender and not the entire amount received.Investment in G-Secs: Currently, insurance companies are mandated to invest at least 50% of the life fund in government securities (G-Secs), which is a considerably high threshold compared to SLR requirement for banks (20.75%). This constraint should be relaxed to help improve fund performance and efficiency.Tax deduction limit: A separate limit of Rs.50,000 for tax deduction should be provided for life insurance premiums apart from the limit under Section 80C. This would incentivize households to channelize more long-term savings.Annuity exemptions: Annuity received out of maturity of pension fund under the pension or annuity policy should be exempt from tax under Section 10(10A). Annuity purchased after maturity of pension policies of life insurance companies should be exempt from service tax.On a final note, the budget is expected to be reformist and development-oriented. We believe it will focus on achieving sustainable growth, encouraging long-term investments and creating an efficient digital ecosystem. In continuation with other significant reforms which this Government has already initiated, the upcoming Budget provides an excellent opportunity to take progressive steps for development and growth of the life insurance industry.The author is MD of Kotak Life Insurance