In a bid to give a fillip to the insurance sector, in the union budget, the government is planning to reduce service tax on premiums, protect existing policies from future tax changes and relax rules on Tax Deducted at Source (TDS) to encourage households into buying more insurance cover.
Government is also likely to propose additional tax breaks for pension products, in addition to the current Rs.1 lakh savings cap. Government may create a separate window for pension products including the National Pension Scheme (NPS) and those issued by insurance companies.
The revenue department has accepted most of the proposals that the insurance industry had suggested during their meeting with Finance Minister P. Chidambaram couple a months ago.
Insurers had demanded a reduction in service tax on first-year regular premium as well as single premium policies, and a complete waiver in social security insurance schemes such as the Aam Admi Bima Yojana. Insurers had also asked for grandfathering of insurance policies and relaxation in the clause that insurance companies have to deduct TDS on payment of agent commission above Rs 20,000.
Most of the demands don’t have large revenue implications, but they will provide a huge push to the insurance sector in terms of cost savings and making administration easier.
These steps will be a part of the government’s efforts to mobilize household savings into the long term savings instruments such as insurance and mutual funds.
Insurers say that grandfathering of an insurance policy is important to retain the confidence of the policyholders. It should not happen that because of changes in tax laws they have to pay tax on the maturity of the insurance policy, when at the time of the buying the policy there was no such tax.
Creation of separate window for insurance policies will channelise long term funds into insurance industry and provide a big boost to the sector.
At present, under section 80C of income tax act, investments in provident fund and insurance premiums, among others, are eligible for tax deductions up to a limit of Rs.1 lakh.
It is likely that now insurance companies have to deduct TDS only if cumulative payments exceed a particular amount.vinay mohanty
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