Incentives for long-term savings are the key

Insurers lament the fact that contributions towards the pension corpus are insignificant

MUMBAI: Insurance is one of the most prominent sectors in the financial space, with 36 life and general insurance companies. The industry has registered a growth of almost 50% (life insurance) in the last year and most players are lining up aggressive expansion plans.

However, much of the growth prospects for the sector would be related to the government’s policy of providing incentives for long-term savings and increasing the foreign direct investment limit.

Currently, under section 80C of the Income Tax Act, there is a tax incentive to save up to Rs1 lakh per annum. However, industry players feel this amount is less than what is needed to secure one’s future cost of living.

“The current tax incentives do not encourage individuals to keep saving for 15-20 years as the tax benefits they get from a more flexible 1-2 years (investment in tax-saving mutual funds or bank fixed deposits) are just as attractive. Hence, we see millions investing for horizons of a few months or at best a few years, but rarely for their own golden years. Those who save more than the Rs1 lakh limit are effectively taxed at both the entry and exit stages,” laments Shikha Sharma, managing director and CEO, ICICI Prudential Life, the largest private-sector player in the Indian insurance market.

She says a separate and additional ring-fenced limit of Rs1 lakh for long-term savings, particularly pensions, should be introduced.

Her views are shared by Aviva India’s managing director, Bert Paterson. “We recommend a separate limit for deductions under Section 80C for long-term saving instruments like life insurance. The government should look at encouraging people to save for the long term,” he says.

Paterson feels tax benefits on pensions and long-term savings need to be increased. The world over, he points out, the development of long term saving instruments has been supported by tax exemptions.

“In India if the government does not offer a separate tax benefit for pension investments of up to Rs1 lakh, the salaried sections will be hit badly as the corpus on retirement will be insufficient,” he says.

Insurers are also seeking a provision to carry forward losses, which would be set off against future profits, for more than eight years. “Insurance business is a long term investment and most insurers do not make profits even in the tenth year. Hence we recommend that the period of carry-forward losses be increased to 12 years,” says Paterson.

Enhancement of tax exemptions under Section 80D for senior citizens is another key demand. To enable greater health coverage for senior citizens, the government should consider allowing an exemption of up to Rs20,000-25,000 per annum per person, for health insurance premiums paid for self/dependants in the age group of 55 years and above.

Experts recommend an exemption of health insurance from service tax for a period of 10 years. Currently, 12.5% service tax is levied on premiums charged by insurers, which adds to the cost of health insurance.

“Extension of service tax exemption for small service providers to life insurance companies is desirable”, feels Trevor Bull, managing director, Tata AIG Life Insurance Company.

The insurance company is liable to pay service tax for its agents, even for agents with a turnover less than Rs 8 lakh per annum.

Lastly, insurers feel the government should raise the FDI limit in insurance to 49% as it would provide the domestic industry with capital for its development and expansion.