Union Budget 2020 is all set to be presented by Finance Minister Nirmala Sitharaman roughly 50 hours from now. While the entire nation awaits with bated breath, many industry experts see this as an excellent opportunity for the government to announce significant measures that will fuel growth momentum and restore confidence in a slowing economy.
Given the current economic scenario, the country requires a pragmatic budget with a real push for the growth to come back. The time is now right to introduce measures and benefits that protect financial future of the citizens.
World over, the life insurance industry is considered as the bedrock of the financial system and therefore the industry is pinning its hopes on the upcoming budget. The industry is vying for some critical steps, which will directly benefit the taxpayers and industry. The government is expected to promote three key elements - focus on bringing more people under the ambit of life insurance, promote long-term savings and encourage capital formation.
Government requires a large amount of money for boosting infrastructure, and insurance companies can provide such large long-term investments. Towards this end, insurance companies want to invest in long-term credit worthy papers. In this light government should have a relook at the minimum investment criteria in government and state securities, which can be relaxed to accommodate credit, enhanced infra bonds. The cap can be judiciously used between government state securities and credit enhanced infra bonds providing additional avenues for insurance companies to invest. This step will hold merit for the investments required by the government for boosting infrastructure while benefitting policyholders as well.
Section 27C in The Insurance Act, 1938 allows retail customers to put their money in foreign assets. However, life insurance companies who are the custodians of these customers’ money are not allowed to do so. This budget should allow the same, which will help insurance companies, diversify their portfolio across domestic and global assets.
The additional contribution of Rs 50,000, which is available for National Pension Scheme (NPS) as tax benefit, should be made available for pension products offered by life insurance companies as well. Currently, salaried individuals can take advantage of this benefit by investing in NPS. Extending the same to life insurance pension products will allow people more avenues and diverse range of products to choose from, thereby fully utilising the extra Rs 50,000 benefit.
Taxation on commuted value of pension products offered by life insurance companies should be at par with NPS. Currently, full 60 per cent commuted value for NPS is tax-free. While, for pension products offered by life insurance companies, though the commutation of 60 per cent is allowed only 40 per cent is tax-free.
In a country with inadequate social security, protection offered by life insurance is inevitable; however, lack of its penetration is plaguing the industry. Meaningful incentives like introducing separate deduction of Rs 50,000 for first time life insurance buyers will generate more demand for life insurance policies.
An additional capping of Rs 50,000 for someone purchasing a pure protection (term) plan will augur higher coverage of life insurance in the country putting its penetration on a faster track. A term plan eliminates financial burden of a family in case of an untimely death of the earning member by acting as an income replacement tool.
Another important move would be to encourage women to insure their lives and savings. Extra tax benefit for women policyholders will be a significant step.
Insurance is for people who die too early or live long enough. In the current tax environment dying too early is protected and tax benefit is provided, whereas, there is no such benefit for individuals living long enough. Therefore, the annuity given to policyholders should be tax-free. For participating policies, this surplus, which is distributed as bonus, should be exempted from tax.
These measures will pave the growth path for the Life Insurance sector, besides increasing the security net of the nation’s people at a very low cost. Let alone promoting the habit of long-term savings, such steps will provide long-term funds for the government to boost overall economic growth of the country.
The author is the MD and CEO, Aditya Birla Sun Life Insurance