Budget 2017: Enhanced tax sops are a must to increase insurance penetration

Rajeev KumarYear 2016 was a pivotal year for Indian economy full of progressive reforms and tough decisions from roll out of GST to demonetization. The Union Budget is around the corner and there is a lot of expectation from Finance Ministry on promoting and focusing on different sectors and industries as the FY 2017-18 will be more around establishing and executing the reforms and changes. Here is an outlook on the expectation from the Union Budget 2017-18 from life insurance industry perspective.Pension policiesCurrently, the additional deduction of INR 50000 under section 80CCD for contribution to NPS is not available for the pension policies issued by life insurance companies. Hence, this additional deduction should also be extended to pension policies sold by life insurance companies. This would help make the pension policies from life insurance companies at par with NPS and will give a level playing field. Pension policies with life insurance cover should be one of the most effective social security measures. Annuity received from pension plans sold by life insurance companies should be made tax free. At least the premium paid by the policy holder and for which no deduction u/s 80 CCC has been claimed should be allowed a deduction from the taxable proceeds from pension policies issued by life insurance companies. This will again contribute to achieve the above said objectives.Like NPS pension products should be exempted from service tax to encourage consumers to plan their future in pension policies provided by life insurance companies as well.Tax deduction for life insurance policiesWith the expectation of the deduction from taxable income limit under section 80C/80 CCC/80CCD be made INR 2 Lakhs, a separate deduction for INR 50,000 should be permitted for life insurance policies only. This would be a real boost for the industry and improve penetration as envisaged by the Government itself which would in turn provide one of the social security measures in India in the journey that the Government has embarked.Proceeds from life insurance policy are tax free under 10(10D) with a condition on the percentage of premium vs the sum assured. The intent is to encourage long term investments. However, this condition becomes unviable for older people as the annual premium increases with age. Thus the condition should have a minimum term of 10 years in the policy as a criterion instead of the annual premium as it becomes less favorable for consumers buying policies at an older age. Also single premium policies with term of 10 years or more will qualify for exemption, which is taxable now. MediclaimWith the medical expenses going up substantially, the deduction under Section 80D for mediclaim premium to individual should be increased to INR 50,000 from the current INR 20,000.Service TaxCurrently, the service tax chargeable for traditional policies is 3.63% on the first year premium and 1.81% for the subsequent years. This should be made consistent across first year and renewal premiums. Also this leaves taxation on single-premium policies in a grey area. Right now, insurance companies are levying first year service tax rate of 3.63% for single-premiums. There needs to be a separate tax structure on single-premium policies to avoid unnecessary burden on policyholders. Life Insurance CompaniesCurrently under the IT law, carry forward of losses by companies is limited to 8 years. With a view that any life insurance company will have a long gestation period of around ten years it is recommended that the carry forward benefit should be allowed for 15 years. Overall, for higher penetration of insurance products in India, there is a need for the products to be lucrative and beneficial for the customers. For the same, the tax and deduction components of an insurance policy need to be relooked at.The author is Chief Financial Officer of Bharti AXA Life Insurance