Articles

The proposed new Direct Taxes Code (DTC) Bill 2010, if implemented in the proposed form, will be detrimental to the interests of individual life insurance policyholders. Under the proposed DTC Bill 2010, deduction for payment towards a typical life insurance cover is allowed if the premium paid in any of the year during the policy term does not exceed 5 per cent of the capital sum assured under the policy. This proposed cap of 5 per cent will deny benefits to large number of policyholders.

For an individual aged 30 years, the minimum term will be around 21-22 years, and for age of 40 years and above, the term will be 28 years or more. This will lead to inequity, as for same term and same sum assured, tax exemption would be available to say a 30 year old person, but not to 40 year old person because of higher term insurance content. Thus, a policyholder of higher age will be forced to pay premiums beyond his working age.

To ensure that life insurance products are for long term, there is a minimum lock-in period of five years. Lock-in period for other financial products is lower, yet they are entitled to tax benefits. The Insurance Regulatory and Development Authority (Irda) in its recommendation to central board of direct taxes (CBDT) has suggested that only those policies should be allowed for deductions which have a minimum maturity period of 10 years. Hence, it will be prudent to revise the minimum term of policies to 10 years, irrespective of the frequency of premium paid during the term.

In DTC Bill 2010, a separate window of a much lower amount of Rs 50,000 has been prescribed for life insurance premiums, tuition fees and health insurance premiums. With increasing costs of education and healthcare services, most of this small limit would be utilised and would leave very little space for life insurance premium. Thus, this shared allocation actually tries to further undermine the importance of life insurance as an asset class and deprive the benefit of social security to the policyholders.

However, the proposed bill provides a total exemption up to Rs 1,00,000 for investments in long-term savings such as employees’ provident fund (EPF), public provident fund (PPF) and New Pension System (NPS), with no prescribed minimum holding period for investment in these instruments. It will be desirable to provide a limit of Rs 1,00,000 for life insurance premiums/ annuities too.

Also, at present, there are approximately 31 crores of in-force policies. The persons holding these policies would be substantially affected if the proposed bill is implemented in its present form, since DTC Bill 2010 does not specify grandfathering of existing policies.

Under the present tax regime, Section 80CCC of the Income Tax Act 1961 provides for deductions in respect of premiums paid under an Irda-approved pension fund / annuity plan. This deduction is allowed up to the aggregate limit of Rs 1,00,000, considering deduction under Section 80C as well. However, under the proposed tax regime (DTC), only amount received under NPS that is used to buy an annuity plan will not be taxable in the year of such receipt. Similar provision needs to be inserted for annuity received by the policyholder from a life insurance company so as to bring parity in long term saving products.

One does get a feeling that the thinkers in the tax planning divisions feel that long-term savings through life insurance is less important for the economy and needs to be discouraged, while only savings through EPF, PPF and NPS are sacrosanct and need to be incentivised through fiscal incentives.

(The writer is the secretary general from Life Insurance Council. The views expressed here are personal)