In order to keep insurance affordable for middle-aged and older individuals Insurance Regulatory and Development Authority (IRDA) is seeking review of two major decisions announced in the Union budget.
Premium-to-sum assured: First decision of which IRDA is seeking review is of premium-to-sum assured. Budget has proposed that an individual can avail tax benefit on insurance only if sum assured is at least ten times the annual premium paid. At present individual can avail tax rebate under section 80C of Income Tax Act if sum assured is at least five times the annual premium paid, up to Rs 1 lakh.
IRDA has expressed concern that if proposed rules will be implemented in current form then policies for middle-aged and older individuals will be deprived of tax benefits. Moreover, at the time of maturity too, they will be taxed.
As per IRDA, due to new rules policyholder’s especially those above the age of 40 years will be doubly taxed. This may deter the sales and growth of the industry.
IRDA also said that there is a flaw in the finance bill regarding linking tax benefits to certain categories of life insurance policies.
IRDA is demanding that government should allow it to decide on matters related to sum assured and premiums.
New rules will discourage middle-aged and older individuals from buying life insurance policies, as they will become expensive. If middle-aged and older individuals have to avail the tax benefit, then sum assured will have to be increased without increasing the annual premium. And if that is done, then such policies will no longer conform to the mortality rates. This liability mismatch could cause serious systemic risk to the industry. As risk cover component for a 30-year-old and 45-year-old policyholder is different for same sum assured.
IRDA is asking that there should be some leeway for designing products for middle-aged and older individuals. If the sum assured is ten times the premium for younger customers then it should be at least seven-eight times for policyholders above the age of 45, or else sum assured has to be increased and which will be risky.
However, industry’s concern is not for term plans as sum assured under such covers is always more than ten times the annual premium paid.
MAT: Second budgetary proposal that IRDA is opposing is of levying Minimum Alternative Tax (MAT) on all companies including insurance firms. At present MAT is not levied on the business of insurers.
At present, all Indian companies, except insurers, pay 30% as the normal rate of income tax and education cess of 2% and secondary and higher education cess of 1% on the tax payable, giving an effective rate of 30.9%.
If profit exceeds Rs 1 crore, a surcharge of 10% is applied on the tax payable at the normal rate with education cesses, translating into an effective rate of 33.22%.
MAT is applied to a company whose tax liability is less than 18% of its book profit. The tax is calculated initially at 18% of the book profit, and with education cesses effective rate translates into 18.54%. If book profit exceeds Rs 1 crore, the tax rate is 19.9305%.
At present, insurers pay normal tax of 12.5% but they don’t need to pay MAT.
IRDA is demanding that MAT might not be removed completely but it should be levied on proportionate basis. If other companies pay MAT of 18% on a normal tax of 30% then insurers should be allowed to pay 7.7% on 12.5% normal tax.
MAT of 18% will be unfavorable for both insurance companies and policyholders. As it will increase premium for policyholders and on the other hand it will adversely effect the profitability and finances of insurers and this will be not beneficial in the scenario when insurers needs 10-12 years to break even.
Premium-to-sum assured: First decision of which IRDA is seeking review is of premium-to-sum assured. Budget has proposed that an individual can avail tax benefit on insurance only if sum assured is at least ten times the annual premium paid. At present individual can avail tax rebate under section 80C of Income Tax Act if sum assured is at least five times the annual premium paid, up to Rs 1 lakh.
IRDA has expressed concern that if proposed rules will be implemented in current form then policies for middle-aged and older individuals will be deprived of tax benefits. Moreover, at the time of maturity too, they will be taxed.
As per IRDA, due to new rules policyholder’s especially those above the age of 40 years will be doubly taxed. This may deter the sales and growth of the industry.
IRDA also said that there is a flaw in the finance bill regarding linking tax benefits to certain categories of life insurance policies.
IRDA is demanding that government should allow it to decide on matters related to sum assured and premiums.
New rules will discourage middle-aged and older individuals from buying life insurance policies, as they will become expensive. If middle-aged and older individuals have to avail the tax benefit, then sum assured will have to be increased without increasing the annual premium. And if that is done, then such policies will no longer conform to the mortality rates. This liability mismatch could cause serious systemic risk to the industry. As risk cover component for a 30-year-old and 45-year-old policyholder is different for same sum assured.
IRDA is asking that there should be some leeway for designing products for middle-aged and older individuals. If the sum assured is ten times the premium for younger customers then it should be at least seven-eight times for policyholders above the age of 45, or else sum assured has to be increased and which will be risky.
However, industry’s concern is not for term plans as sum assured under such covers is always more than ten times the annual premium paid.
MAT: Second budgetary proposal that IRDA is opposing is of levying Minimum Alternative Tax (MAT) on all companies including insurance firms. At present MAT is not levied on the business of insurers.
At present, all Indian companies, except insurers, pay 30% as the normal rate of income tax and education cess of 2% and secondary and higher education cess of 1% on the tax payable, giving an effective rate of 30.9%.
If profit exceeds Rs 1 crore, a surcharge of 10% is applied on the tax payable at the normal rate with education cesses, translating into an effective rate of 33.22%.
MAT is applied to a company whose tax liability is less than 18% of its book profit. The tax is calculated initially at 18% of the book profit, and with education cesses effective rate translates into 18.54%. If book profit exceeds Rs 1 crore, the tax rate is 19.9305%.
At present, insurers pay normal tax of 12.5% but they don’t need to pay MAT.
IRDA is demanding that MAT might not be removed completely but it should be levied on proportionate basis. If other companies pay MAT of 18% on a normal tax of 30% then insurers should be allowed to pay 7.7% on 12.5% normal tax.
MAT of 18% will be unfavorable for both insurance companies and policyholders. As it will increase premium for policyholders and on the other hand it will adversely effect the profitability and finances of insurers and this will be not beneficial in the scenario when insurers needs 10-12 years to break even.
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