With Budget 2023 just a few weeks away, the insurance industry is expecting some announcements in favour of policyholders and clarity on taxation from FM Nirmala Sitharaman.
Union Finance Minister Nirmala Sitharaman will deliver the Budget for the current year on February 1, 2023. With this Budget, expectations are high that there will be announcements in favour of the insurance sector and policyholders. These may include higher deductions for health insurance premiums, separate tax deduction provision for life insurance along with change in Unit Linked Insurance Plan (ULIP) taxation. Let's take a look at these one by one:
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Higher deductions for health insurance premiums
The Section 80D deduction in respect of health insurance premium is capped up to Rs 25,000/50,000. Considering the increase in costs of medical treatments, the cost of comprehensive insurances has increased manifold and hence, the erstwhile limit under this section may be increased to Rs 50,000/1 lakh, insurance experts say.
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Special tax deduction for life insurance
Even though Section 80C of Income-tax Act, 1961 provides deduction for life insurance premia, the limit of deduction up to Rs 1.5 lakh includes other eligible savings under Section 80C, 80CCC & 80CCD, leaving little/no leg room for deductions for life insurance premia, said Conjeevaram Baradhwaj, Executive Vice President (Legal & Compliance) and Company Secretary at Future Generali India Life Insurance Company Ltd.
"There is a need for providing special tax deduction up to say, Rs 50,000 only for life insurance premia, (including term insurance and pension policies) This would also provide tax deduction parity for pension plans of life insurers with the pension plans under New Pension System (NPS) regulated by PFRDA, which are entitled for an additional special deduction of Rs 50,000 p.a. under Section 80CCD(1B)," Baradhwaj said.
Clarity on taxation of life insurance business
The other issue on which the industry needs some clarity is the taxation of life insurance business. There have been many tax litigations during the last 20 years on income tax assessment of life insurance companies. However, Baradhwaj believes that the central government needs to form a joint consultative committee of tax and consult industry experts to make recommendations for amendments to Income-tax Act, 1961 on taxation of life insurance business, besides working out a formula for settling the outstanding tax litigations.
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"An attempt was made in the draft Direct Tax Code 2010 to bring clarity on this subject, but the draft code lapsed subsequently," he said.
Parity between annuity/pension products
Today, most Indians worry about funds not lasting through retirement. To increase awareness and promote retirement savings, especially amongst millennial consumers, Prashant Tripathy, MD & CEO at Max Life Insurance, thinks that the government should bring parity between annuity/pension products issued by life insurance companies and other saving products.
"Similarly, in comparison to saving products like fixed deposits, only accretion should be taxed in life insurance annuity/pension products, not the principal repayment. An additional deduction of Rs 50,000 that is available for contributions made to the National Pension System (NPS), should apply to all annuity and pension plans to make them more attractive as a financial investment tool," Tripathy told CNBC-TV18.com.
Change in ULIP taxation
Insurance industry experts say that ULIP taxation should be simplified. As of now, ULIPs are taxable in cases with an aggregated premium amount of Rs 2.5 lakh p.a or more. The maturity amount was earlier tax-free under Section 10(10D) of the Income Tax Act.
This should be reversed as it disincentivises big ticket investments, experts say.