Budget should bring on par tax treatment of pension products of life insurance with similar products on other platforms

The upcoming Union Budget 2017-18 will be a momentous one in more than one ways. As the government enters second half of its appointed tenure, it would aim at capitalising on various significant reforms initiated in the first half, and use the budget to provide the required impetus for growth with an eye on 2019 general elections. Secondly, this will be the first-ever budget to be presented on 1 February, a good one month early, reflecting the intent of the government to get the Finance Bill passed before close of current financial year, emphasising the focus on execution right from beginning of the next financial year. Third, for the first time Railway budget will be incorporated into the General Budget . [caption id=“attachment_2650880” align=“alignleft” width=“380”]  Arun Jaitley. File photo. AP[/caption] This budget is also unique owing to the fact that it is set in the backdrop of hugely significant domestic and international events. Demonetisation is a landmark reform which in the long-term will transform the financial sector, and in the medium term will significantly boost financial savings, reduce inefficient cash in the system, and encourage efficient ways of financial transactions. Secondly, it is likely that interest rates may be close to their bottom, as RBI held on to the rates in the last monetary policy review against market expectations of a cut, suggesting that the rates may gradually start inching up. On the global front, election of Donald Trump is a major event, and India will be keenly observing the economic policies of his government, especially in areas like immigration, increase in government spending, thrust on infrastructure spending, coupled with expected reduction in taxes, and the resultant effect on fiscal deficit, etc. which are likely to have effects on the Indian economy and currency. Given this backdrop, this budget will necessarily have to focus on the key themes of growth, consumption, efficiency through cost reduction, and improving tax to GDP ratio through better tax administration and tax compliance. Firstly, a renewed focus is expected to be placed on agricultural sector with a view to reviving agricultural growth and improving farm incomes. The Prime Minister has recently spoken about the objective of doubling farmers’ income by 2022. Steps would have to be taken to ensure adequate flow of credit to the sector, strengthening procurement at support prices, irrigation technologies, creation of a national e-market for farm produce, apart from ensuring fair prices for the producer and other initiatives such as the crop insurance scheme launched in the last budget, which is expected to cover more than 50 percent of the farmers within the next couple of years. In keeping with the vision of the government to achieve “minimum government and maximum governance”, we can expect steps to review the manpower and administrative costs of government departments, define qualification criteria for government servants in order to ensure better execution, reduce bureaucracy and improve ease of doing business, rationalize social welfare schemes and further emphasis on direct benefit transfer (DBT) program for distribution of subsidies. The persistence of poverty and significant leakages in welfare schemes that aim to alleviate it has prompted to move towards a “universal basic income”. UBI may be evaluated in India for targeted delivery of subsidy on an Aadhar-based platform with a direct transfer model. Effect of demonetisation on tax collections is expected to be positive in the short term due to scrutiny of cash deposits, and in the long term due to better tax compliance. Short term effects like decline in consumption spending can be offset by making more surplus available in the hands of individuals and corporates, by reducing tax rates and increasing tax exemption slabs. While steps have already been initiated to encourage a digital ecosystem (cashless or “less cash” transactions), the journey can be accelerated with further steps for prevention of creation of new black money and discouraging cash transactions say by imposing taxes. Life Insurance industry Life insurance industry plays a significant role in nation building. It is the most important channel of long-term savings of households. It is the second most preferred investment avenue of households next only to bank deposits – approximately 19 percent of net incremental household financial savings for FY16 went into life insurance funds. The industry is a significant contributor to infrastructure investments (more than Rs 3 lakh crore in FY16), which is growing each year. Insurance companies hold a significant part of government debt – as per public debt management report of the ministry of finance, insurance companies held 22.2 percent of outstanding government of India securities as of March 2016. Some definite steps are required to be taken for development and growth of this industry, to make it more efficient, and to create parity with other similar products. Presently insurance companies are required to invest at least 50 percent of the life fund in government securities, which is a considerably high threshold compared to SLR requirement of 20.75 percent for banks. The restriction should be relaxed with a view to improving fund performance and efficiency. A separate limit of Rs 50,000 for tax deduction should be provided for life insurance premiums apart from the limit under Section 80C. This would incentivise households to channelise more long-term savings. The condition that sum assured has to be at least ten times of annual premium in order for the proceeds to be exempt under Section 10(10D), needs to be done away with; the decision must be left to customers rather than enforcing high cover. Besides, Section 80D limit should be enhanced to Rs 50,000 to encourage medical insurance cover. Tax treatment of pension products of life insurance companies should be at par with similar products offered on other platforms. Tax treatment should be based on nature and objective of the product rather than the platform, which will ensure a level playing field. Premium paid upto Rs 50,000 for a pension policy from a life insurance company should be treated at par with NPS by providing for an additional deduction under Section 80CCD(1B) and further additional deduction under Section 80CCC to the extent of 10 percent of salary. Annuity received out of maturity of pension fund under the pension or annuity policy should be exempt from tax under Section 10(10A). Annuity purchased after maturity of pension policies of life insurance companies should be exempt from service tax. Life insurance pension policy should be treated as a capital asset and only the gain should be taxed on maturity or surrender and not the entire amount received. On a final note, the budget is expected to be reformist and development-oriented, and will focus on the achieving sustainable growth, encouraging long-term investments and creating an efficient digital ecosystem. (The writer is Managing Director, Kotak Mahindra Old Mutual Life Insurance) For full coverage of Union Budget 2017 click here .