By Tarun Chugh
India has grown leaps and bounds in terms of broadening the ambit of financial inclusion. From just 40 per cent adults having bank accounts in 2011 to almost 80 per cent in 2017, we have come a long way in terms of providing access to the financial system to our citizens.
Now that almost every household has a bank account, it’s time to deepen the financial inclusiveness. Even as the insurance industry is carving out its space by leveraging digital technologies and last-mile partnerships to deepen insurance penetration from the current levels of just 4 per cent of the GDP, a lot more is possible with the right incentives from the government. The overall market size is expected to be $280 billion by the end of 2020 with immense growth potential.
The upcoming Budget provides a good opportunity for the government to realign taxes and other financial incentives such as deductions with the growth in disposable incomes as well as the rising middle-class population, which demands more sophisticated financial products to match its needs and aspirations. In this vein, boosting insurance penetration should be a key priority for a country like India where there’s limited to no social security.
While we await what the finance minister has to offer, here’s a wishlist of larger expectations within the insurance industry regarding the upcoming Budget. These measures can help improve the proliferation and popularity of insurance.
Rationalise GST: Life insurance policies are taxed at the standard rate of 18 per cent GST. The tax burden on individuals is too high when considering an essential product like life insurance and reduces their ability to have the right coverage. As the sector mobilises savings into productive financial markets, the government should consider the important role played by this sector and provide incentives for as many people as possible to buy insurance.
Life insurance services may be taxed at a lower rate of 12 per cent, which can boost the growth in demand for insurance in the country and it is likely to more than offset the temporary reduction in the government’s revenues.
Additionally, the schemes promoted by the government such as micro-insurance for term contracts or health covers etc. should be zero-rated. This would result in 100 per cent credit availability to life insurance companies and reduce the tax cost of providing these insurance services and improve the insurance penetration in the country.
Make Section 80C wider: The current limit of Rs 1.5 lakh total exemption under Section 80C is insufficient in consideration with the rise in levels of income which makes it difficult to leverage all possible deductions such as those for tuition fee, housing loan repayment, provident fund contributions etc. The government should consider creating an additional exemption clause for life insurance outside of Section 80C limits to incentivise people to buy insurance to meet their financial goals.
If not, the government should seek to increase the current limit from Rs 1.5 lakh to Rs 3 lakh in order to provide a wide-enough exemption bracket. A bigger bracket will propel more people to invest in long-term financial products such as life-insurance and boost the availability of long-term capital in the economy as a whole.
Parity with NPS: The National Pension Scheme and pension plans offered by insurance companies have the common objective of helping people build a retirement corpus and invest for their future. However, the tax treatment for NPS and pension plans differ which results in arbitrage in favour of the NPS – a situation that must be corrected since both products equally contribute to the growth of the economy.
For instance:
- Contribution to pension plans should be tax-exempt in a similar way that contributions by employees under NPS are exempt up to Rs 50,000.
- Contributions by employers are deductible if they don’t exceed 10 per cent of the employee’s salary under NPS but no such exemption exists for pension plans
- While NPS doesn’t have any GST provision but there’s 1.8 per cent GST payable on the value of the annuity from a pension (Life Insurance) corpus.
Making annuities tax free: Annuities are an important part of the welfare net for senior citizens who are the major beneficiaries of these schemes. However, even though annuities play an important role in securing the post-retirement life, the tax paid by senior citizens on the receipt of their retirement savings is not in line with the welfare policy. Moreover, taxes often reduce savings substantially.
It is recommended that annuities be made completely tax-free to promote social and economic welfare in the country.
(Tarun Chugh is MD & CEO, Bajaj Allianz Life Insurance)
Source: Economic Times
