Since the opening of the sector in 2000, the insurance industry has seen tectonic shifts in terms of regulations. To provide impetus to the life sector we need to see some enabling tax laws. This year we have a clear list of expectations from Finance Minister, Arun Jaitley, for the life insurance sector:
>>Separate limit for long-term savings and pensions under Section 80C: The most crucial recommendation which has been raised over the years is to increase tax benefits around long-term savings to spur demand for life insurance products. The government took this into account when presenting the budget in FY2014-15 and increased the overall investment limit under Section 80C by Rs 50,000. While this was a positive step, we would still appeal for a separate sub-limit for insurance and pensions under Section 80C.
The total protection level of the citizens of India is only about 60% of the GDP, while it is 99% and 178% in China and Malaysia, respectively. In developed markets like the US, UK & Japan it is above 250%. In a country like ours with low level of social security, protection levels are far too low. The additional leeway in Section 80C will encourage people to buy additional life insurance to protect their family's financial future, while getting a tax benefit.
In India, there are 80 crore people below 35 years of age who need to start planning quickly for their retirement. And 71% of them are concerned about running out of money in their retirement years. Our private pension assets will be at around $300 bn by 2019 less than 10% of GDP. This will add pressure on social security and retirement needs. Being a young a country, there is a huge potential for pension plans as one needs to invest early to build a corpus for retirement years. Hence for a level playing field, the government can consider allowing pension products offered by life insurance, mutual funds to come under Section 80CCD like the NPS where investments by employers can help employees avail extra benefits.
Simplification in Tax proceedings and assessments:
Direct Tax: Currently, to avail tax benefits for a life insurance policy under 10(10D), the Sum Assured or Life Cover has to be a minimum of 10 times of the First Year premium. We would request the Government to relook at this limit and bring it down to 5 times for availing tax benefits. This would help in increasing insurance penetration and avoid double taxation as the customer is currently taxed at the time of buying the policy and also on maturity if the limit is not met. This has impacted the growth of industry as now people are reluctant to purchase insurance products which more investment driven.
>>Taxation of Insurance companies: Also the overall tax structure for the industry needs to be streamlined for ease of administration and optimum utilization of resources. We would request for further clarity on the tax laws, especially related to computation of Profits for Insurance companies and Point of Taxation for Service Tax. This would help simplify assessment and litigation processes.
A growing middle class, rising levels of income and spending, increasing insurance awareness, and higher infrastructure investments have laid a strong foundation for the growth of the insurance industry in India. The country's insurable population is expected to touch 75 crore by 2020, with life expectancy of the average citizen reaching 74 years. The life insurance industry is projected to account for 35 per cent of total domestic savings by the end of this decade, compared to 26 per cent in FY 2009-10.
The insurance industry is uniquely positioned to help the Indian economy meet a host of challenges over the medium and long term. However, a lot would depend on the ability of the sector to attract new capital, as well as on the ability of policy makers to facilitate a conducive environment for the industry to operate in.
Tarun Chugh is MD & CEO at PNB MetLife.