With Union Budget 2013-14 round the corner, life insurers are urging the government to introduce separate tax deduction for investments in retirement savings outside the Rs 1 lakh deduction that is currently available under Section 80C of the Income Tax Act and a reduction in service tax rates after last year's 2 per cent increase.
"With the life span of Indians increasing and absence of social security and adequate retirement savings, a separate limit of Rs 1 lakh must be created and tax on annuities abolished to strengthen pension inflows. This will not only increase life insurance penetration but also ensure long-term funds for infrastructure," says Rajesh Sud, CEO and MD, Max Life Insurance.
At present, payments towards pension are part of the Section 80C limit. Annuities, too, are taxable. This means there are no additional incentives for investors to put money in pension products.
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On service tax, Sandeep Ghosh, MD and CEO, Bharti AXA Life, says, "Earlier, service tax on endowment plans was 1.5 per cent of the premium. Last year, the rules were changed by increasing the service tax to 3 per cent for the first-year premium and to 1.5 per cent in the subsequent years."
"Because of this, customers have to pay a higher premium in the first year. We feel calculating service tax at two rates defies the concept of charging level premium from policyholders," says Ghosh.
There has been an 8.22 per cent drop in insurance sales in 2011-12 from the previous year.
Moreover, there is an immediate need to push long-term savings as the Reserve Bank of India estimates show that the net financial savings of the household sector declined from 9.3 per cent of gross domestic product, or GDP, in 2009-10 to 7.8 per cent of GDP in 2011-12. Insurance, being a key contributor to total household savings, can fill this gap.
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The fall in penetration of insurance and dull growth prospects are a big concern for insurers.
"India's insurance penetration was 4.4 per cent in 2009-10 and 4.2 per cent in 2010-11. It fell to 3.4 per cent in 2011-12 and is expected to further slide to around 3 per cent in 2012-13. Moreover, the Indian life insurance market is among the least profitable across Asia. Keeping this in mind, the Budget should address issues that will help make this industry attractive for both policyholders and shareholders," says Sud.
There is a possibility of pension and insurance Bills being introduced in the Budget session.
For insurers, the Bill seeks to provide a big window to raise capital from abroad. For policyholders, an important change will be in the claim repudiation period. The Bill seeks to cap the period during which a policy can be repudiated on any ground (including mis-statement of facts) at three years from the start of the policy. This means no policy will be called into question or claim rejected on grounds of mis-statement after three years.