Budget 2015: Here’s why Govt needs to promote pension and annuity

The insurance sector that witnessed some major reforms under the NaMo government is keenly awaiting the Union Budget for the year 2015-16. In a huge relief to the industry players, the government raised the FDI cap from 26% to 49%. With a decisive move such as this, the industry is hoping that the Centre will now announce policy reforms that will further attract investments in this staggering sector.

“At various forums, Government of India has expressed its eagerness to boost the financial savings in the country and Insurance industry is one of the best placed to channelize long term financial savings,” said Deepak Mittal, managing director and CEO of Edelweiss Tokio Life Insurance Company Limited.

Promote pensions and annuity

Often, while planning one’s retirement, pensions and annuities are a less preferred option among the many available security instruments. This is so because the current tax does not allow huge returns on the annuity offered by the insurance companies. According to Mittal, the government needs to make pensions and annuity a more attractive investment option by reforming the tax policy for these financial instruments.

“One of the important customer needs which drives savings behaviour is Retirement planning. This becomes even more important in a country like India because of increasing life expectancy and inadequate social security measures. Insurance industry plays a very important role through pension and annuity products,” said Mittal.

“The current tax laws adversely discriminate against pensions and annuities and thereby create a disincentive for retirement planning through these products. We expect that this long standing anomaly will be corrected and this will help customers in saving effectively for their retirement needs,” he added.

Make tax deductions exclusive

Insurance companies have always felt that they have been at a disadvantage because other financial securities such as People’s Provident Fund (PPF), mutual funds among others are provisioned for tax deductions under section 80C of the Income Tax Act. Hence, this tax benefit makes insurance a less preferred security.

Industry experts have demanded the government to make tax benefits under Section 80C exclusive for insurance products. “A large number of people exhaust most of this limit because of provident fund contribution. Thus, the amount invested in life insurance policies is quite less”, said a report by PolicyX, a policy comparison website.

It further added, “This will ensure that people invest more in life insurance plans. This demand sounds good but at the same time, there is hardly any chance to introduce any such provisions during this budget”.

Push for universal KYC and single de-mat account

“Finance Minister Arun Jaitley in his maiden budget speech had announced the concept of Universal KYC and a single demat account across asset classes. This is a powerful idea and if implemented well will be a big ease to customers of financial products across BFSI sector. We look forward to further clarity and operationalization of this initiative,” noted Mittal.

Revalue the sum assured to premium ratio

It should be noted that the life insurance product become unattractive as the tax benefits offered on these policies are available only in cases where the sum assured to premium ratio is at least 10. “While this provision was made with the intention to increase the cover provided by life insurance companies, it also ends up making the policies unattractive for middle and higher age groups given that there is an exponential rise in the cost of mortality in later years. We look forward to some relaxation in these guidelines either in form of tax benefits linked to the tenure of the policy or lower multiples for higher age customers,” stated Mittal.

Our view:

Insurance is a key sector in the financial industry and measures need to be taken to boost the sector. While excluding mutual funds and other financial securities from tax deductions under Section 80C of IT Act is not feasible, the government must definitely look at making pensions and annuity more attractive by exempting them from taxes.

Image: Indiatimes.com