Budget 2010-11 is round the corner. In the last year's budget announcement, some significant changes were made to the taxation of insurance and saving instruments. The removal of service tax on all charges under unit linked insurance products (ULIP) except on FMC, has benefited the policyholders.
Also, the reduction in tax rate upto Rs 8 lakhs ensures more money in the hands of the tax payer, which will promote savings. Whilst these initiatives were welcome it is, on and of itself, not sufficient to stimulate growth in a sector that is of prime importance for the future economic well-being of India.
Tax incentive for long term savings
We would recommend a separate limit for deductions under Section 80C for long-term saving instruments like life insurance. Currently, the deduction under Section 80C also includes short-term saving instruments like some mutual funds and fixed deposits.
Life Insurance and Pensions are the only segments of financial services that address the needs of individuals in the long-term. Hence, the Government should look at encouraging people to save for long-term by providing a separate limit for long-term savings.
Carry forward of losses for long-term gestation business
Insurance business is a long-term gestation business. Currently, we are allowed to carry forward losses for only eight years. Most insurers do not make profit even in the 10th year. Hence, we recommend that the period for carry forward of losses is increased to 12 years.
Proposed EET treatment of long-term savings and investment product under the DTC- Section 10(10D)
The insurance industry in India is at a nascent stage. Taxing the maturity proceeds will adversely impact the life insurance business and the industry. It will discourage investors to invest in long-term savings as it may result in unjustified tax burden especially on those customers who do not avail the benefit under Section 80C.
Currently, the first two stages under the life insurance policies ie., investment and accretion are not completely tax fee. At the time of investment, the tax benefit is available only upto the maximum limit of Rs 1 lakh. This is subject to the condition that, the sum assured is at least five times of the annual premium.
Further, accretion is taxed as life insurance companies are required to pay tax at the rate of 12.5 per cent on the surplus and service tax at 10 per cent is on all charges including mortality charge and commission paid to the agents.
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