Budget 2021: Life insurers seek separate tax carve-out for products to boost penetration


The insurance industry is seeking tax incentives from the government in Budget 2021 to make products more attractive for customers. Union Budget 2021 will be presented on February 1 by Finance Minister Nirmala Sitharaman.

Insurers want higher tax exemptions under Section 80C to be set aside for insurance products so that more customers buy products as a tax saving option. Currently, life insurance premium paid in a given year is eligible for tax exemption under Section 80C, which has a limit of Rs 1.5 lakh annually.

Insurers want the exemption to either be increased to upwards of Rs 2 lakh or have a separate sub-limit carved out for insurance premiums.

Sanjay Tiwari, Director-Strategy, Exide Life Insurance, said that his company was hopeful that the Union Budget would create a separate category to avail of tax benefits for premiums paid towards life insurance.

“This will allow policyholders to diversify their investment into various life insurance products to meet their financial goals comfortably while also availing tax benefits. We also hope the Budget will address the high GST rate on protection plans, which is a deterrent for potential buyers at the moment,” he added.

On motor insurance, term plans and unit-linked insurance plans, GST is applicable at 18 percent. For endowment policies that have a savings element, a 4.5 percent GST rate is levied for the first year and 2.25 percent subsequently. Single premium annuity policies attract 1.8 percent GST.

 Parity in tax benefits for NPS and insurance products

Life insurers are seeking parity in taxation when it comes to pension/annuity products offered by their sector versus the National Pension System (NPS).

At present, NPS has an additional Rs 50,000 available for tax exemption under Section 80CCD for contributions made to this scheme every year.

Since no separate tax benefit is available for pension schemes of insurers, the sector has sought a similar incentive for investing in traditional insurance plans meant for retirement.

Kamesh Rao, MD & CEO, Aditya Birla Sun Life Insurance, said that the budget should announce measures to bring parity between pension products offered by life insurers and NPS. He explained that since NPS offers additional tax deductions of Rs 50,000 under section 80CCD, life insurers’ pension plans don’t have this benefit, which makes it unattractive.

“Additionally, life insurers offer annuities as retirement income, for which they generally invest the fund in government securities for long-term guaranteed returns, which also plays a significant role in nation-building. The government should increase the supply of long dated (40-50 years) bonds for increased liquidity in the market,” he added.

Concurring with this view, Rushabh Gandhi, Deputy CEO, IndiaFirst Life Insurance, said that in Budget 2021, having a separate tax deduction towards insurance premiums over and above the current 80C limit would be beneficial to customers.

“Enhancing the insurance limits under section 80C & 80D will further encourage people to opt for life insurance. Implementing either of the proposed recommendations will aid in bridging the protection gap in the country,” he added.

As per Swiss Re data, insurance density, which is premium per capita, stood at $ 78 (approximately Rs 5,850) in FY20 compared to $ 74 (approximately Rs 5,550) in FY19. The world average was $ 818 (Rs 61,350 approximately) in FY20.

Insurance penetration (premiums as a percentage of gross domestic product) stood at 3.76 percent in India for FY20. Life insurance penetration for the same year stood at 2.82 percent as against the world average of 3.55 percent.