Budget 2018 – Structural Changes & Enhanced Tax Sops for better Insurance Penetration in India

Budget 2018 is around the corner. 1^st February 2018 our Finance Minister, Mr. Arun Jaitley will unveil the budget 2018 which will be the last Budget of the NDA Government. With major financial restructuring like the introduction of GST, Demonetisation in the past year, the economic landscape has undergone impactful changes affecting the common man. This budget, the expectations are high and audacious reforms are expected to give tax relief to the common man. If we touch base on the Insurance Industry, the insurance penetration in India is low and less than 4% as compared to a global penetration level.

Insurance in India is still a push product and is considered as one of the stand-by options to save tax. Pure protection plans like Term Insurance plans are still underestimated as they don’t offer any investment returns at maturity like any other saving or endowment insurance plans. Also, there are no special tax sops to create a pull effect of insurance products for the common taxpayer as compared to other tax-saving investment options

Similarly, health insurance is another arena, which needs a higher penetration. Health care expenses are on a rise. The out-of-pocket expenses by the people are gigantically resulting in squeezing their savings to afford health-related expenditures. Lack of health insurance schemes and expensive health insurance plans with the impact of GST could be the fundamental reasons for the same.

Following structural changes are recommended by Industry Experts to offer Tax Sops in the upcoming budget 2018 to enhance the insurance penetration in India:

Revision under section 80 C Tax Deduction Limit

It is imperative to broaden the tax deduction limits under section 80 C from Rs 1.5 Lakh to at least Rs 2 Lakh to accommodate the life insurance and pension products to offer an equitable space. The same has been suggested by a few of the industry experts.

“Out of the various deductions available under the Act, section 80C is primarily an investment-led tax avenue that helps in reducing one’s tax liability. Further, it helps in increasing the savings of individuals that can help them meet their financial goals. “We expect Budget 2018 to increase the Section 80C investment limit for tax saving from the current Rs 1.5 lakh to Rs 2 lakh,” says Sonu Iyer, tax partner, and people advisory services leader, EY.”

“Considering the steep rise in the cost of living due to inflation, it is suggested that the basic limit for exemption and other income slabs should be enhanced to give benefit to the low-income group. The income trigger for peak rate in other countries is significantly higher,” industry chamber CII said in its pre-Budget memorandum to the finance ministry.

The protection and health needs of the lower middle class and weaker sections of society have been largely unaddressed. Therefore, if a separate tax deduction for life, as well as health Insurance u/s 80 other than section 80C & 80D, is given, it would help a large chunk of the population suggested Anoop Pabby, Managing Director & CEO of Pramerica Life Insurance Limited.

Incentivizing Health Insurance

The Higher tax deduction limits and separate tax saving window for health insurance plans under section 80 D will allow a pull towards health insurance plans to avail the coverage offered under health insurance plans and to choose the right amount of health cover. Currently, the individual (< 60 years) can claim tax deduction up to Rs 25,000 for a health insurance premium, whereas senior citizens can claim up to Rs 30,000.

Hence, it is vital to revise the limit of tax benefits for health insurance under Section 80 D, not just in the upcoming Union Budget, but on a fairly continual basis to be at par with rising medical costs and to encourage Indian citizens to buy insurance,” says Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance.

Various other ways to incentivize health insurance can be looked at to look at the larger coverage of masses under a health insurance umbrella as suggested by various industry experts.

To encourage people to insure themselves for a longer period, tax exemption should be available each year based on the number of years covered. Alternatively, tax exemption can be multiplied by the number of years of coverage. The tax benefits will help boost penetration of health insurance as well as help nurture a culture of preventive healthcare in India. For specialized health insurance companies, the period of carrying forward of business loss and depreciation should be extended to at least 12 years, says Ashish Mehrotra, MD & CEO, Niva Bupa

The medical expenses of the average household can easily exceed the medical allowance limit of Rs 15,000 per year. Health insurance policies normally don’t cover expenses like consultation fees, medicines, and diagnostics, and individuals have to shell the extra amount out of their own pocket. Companies usually cap the medical allowance at the tax-free limit of Rs 15,000. If this limit is revised upwards, companies will also be encouraged to hike the allowance says Sandeep Patel, Ceo & Md, Cigna TTk Health Insurance.

18% GST to reduce to a Single Digit

The Goods and services tax has increased the tax incidence on consumers by 3%. Earlier, the service tax charged was 15% (inclusive of education cess and Krishi Kalyan cess) which has risen up to 18% with the introduction of GST resulting in the increase in the purchase cost for the insurance products. The recommendations by the industry experts suggest bringing the GST from 18% to 5% whereas some suggest the abolition of any kind of tax burden on essential insurance plans of insurance like life and health insurance.

A lower GST rate on premiums would make health insurance cheaper and affordable for all policyholders, especially senior citizens and pensioners. With regard to group medical insurance for employees, the GST component on premiums paid for the same should be eligible for input credit,” says Anuj Gulati, Managing Director, and CEO, Religare Health Insurance.

We urge the concerned authority to consider pure protection life and health insurance as an ‘essential service and therefore give these either complete exemption from tax or subject them to low single-digit tax only,” says Ashish Kumar Srivastava, MD & CEO, PNB MetLife.

Tax sops for Home Insurance

Mumbai floods in the year 2017 and Chennai rains in the year 2015 have been a constant reminder of the catastrophic loss. Many people have lost their properties and valuables in such natural disasters. This brings the awareness and the need to ensure your homes and other properties. Special tax sops can excite people towards this proposition.

Compulsory home insurance for a basic sum insured of Rs 2 lakh wherein the policyholder pays a small premium and the premium paid towards the same is exempted from tax, says G Srinivasan is Chairman-cum-Managing Director of New India Assurance Company.

To make home insurance pervasive, there needs to be a concerted effort from all stakeholders including the government. The government should make home insurance compulsory and incentivize home buyers by providing income tax benefits for the premium paid towards a policy. This will not only ensure protection against financial loss for customers but will also aid in deepening insurance penetration in the country says K.G. Krishnamoorthy Rao, MD, and CEO, Future Generali India Insurance.

Pension Plans to be kept at parity with tax benefits offered under NPS

According to an RBI report, only a small number of Indians above 65 years of age have saved in private pension plans and a large segment of the total population has not taken any steps to ensure adequate financial coverage during retirement. Similar to NPS, a special tax deduction should be introduced for Pension plans offered by Insurers.

Currently, if an investor does not buy an annuity on maturity, 66% of the corpus is taxed. Even the pension from the annuity is treated as income and taxed accordingly. Both these tax rules should be relaxed to encourage people to invest in pension plans says Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance

There is a need to bring the life insurance industry on a level playing field with NPS, to create a meaningful retirement corpus for a large majority of Indians. Life insurance commands one of the deepest retail reaches, which should be leveraged to nudge Indian households towards retirement planning by providing tax benefits says Rajesh Sud, Executive Vice-chairman and MD, Max Life Insurance.

Disclaimer: Expert views are taken from different newspaper editions in order to collate and gather robust expectations of the subject matter experts of the Insurance Industry from BUDGET 2018.