Around 3.7 crore EPF members may be fretting over the government’s proposal to tax 60 per cent of the corpus unless it is diverted into an annuity plan, but there is conspicuous cheer from one corner — life insurance companies. They are the only ones offering annuity products and could end up as the beneficiaries of any move that potentially forces a portion of the EPF money to flow in to annuity pension schemes for tax reasons.
In the Budget presented on Monday, the finance minister Arun Jaitley proposed to tax 60 per cent of the EPF corpus at the time of withdrawal. As it drew criticism from several corners, the government on Tuesday clarified that the money would not attract tax if an employee contributes 60 per cent of the corpus in annuity products provided by insurance companies. Top officials at least two life insurance companies admitted that the move will provide a big impetus to the annuity business in India.
A member of the EPFO’s Central Board of Trustees on Wednesday alluded to the government’s push towards annuity-based pension schemes being done to create a market for insurance companies. “Once the government increased the FDI limit in insurance from 26 per cent to 49 per cent, all the effort has been to increase their business. On Tuesday, by stating in their clarification that the withdrawal from EPF will not be taxed if it is invested in annuity schemes, the government is trying to create market for pension products offered by insurance companies,” DL, Sachdev, All India Trade Union Congress Secretary told The Indian Express.
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The Indian insurance sector has witnessed a rebound in investor interest after the Centre hiked the FDI cap from 26 per cent to up to 49 per cent and Parliament ratified the decision in March 2015. Till December 2015, at least 10 insurance companies saw an increase in stake by their foreign partners in Indian joint venture insurance firms.
Interestingly, the move to push salaried people towards annuity products comes at a time when the global experience points to efforts by governments to diversify the option before people beyond annuity instruments. In the UK, for instance, until April 6, 2015, most people with a defined contribution pension had to buy an annuity as the pension tax legislation strongly encouraged this, applying a 55 per cent tax charge to lump sum or flexible payments other than in limited circumstances. Changes, however, were introduced in April last year, wherein the UK Government radically increased the size of the pension pot that could be taken as a lump sum and introduced more flexibility into income drawdown arrangements — which allows an individual to draw an income from their fund while leaving the rest of it invested. In the UK, annuities have been among the biggest money-spinners for the listed life insurers and these schemes, in 2014, reportedly accounted for around a fifth of British life insurers’ revenues — and two-thirds of their “new business” profits.
In India, the insurance players have reacted to the move by saying that this will provide an impetus to annuity products, even as they called for tax benefit on annuity income. “The proposal will definitely provide a boost to the annuity business in the long-term. However, under the current Income Tax laws the entire annuity is taxable in the hands of the recipient making the product unattractive. Annuities have two components viz. interest and principal. There is a need to consider exempting the principal component of the annuity from tax,” said Sandeep Batra, ED, ICICI Prudential Life Insurance.
Amit Kumar Roy, chief distribution officer at Aegon Life said, “The government’s proposal will definitely provide an impetus to the pension market, which is currently very small. Other than the Central government employees, very few have the pension security.”
While the government has currently proposed to allow only annuity product as the option where the money can be deployed for tax gain, financial planners say that the government should look to expand the option beyond just one scheme. “While Indians like to have access to their capital, investing in annuity product locks the capital. The government should look to expand the options for investors where they can park 60 per cent of the EPF corpus. It will allow the investor to invest a part of the corpus with annuity product and the other part somewhere else where there is access to capital,” said a certified financial planner, who did not wish to be named.
The UK’s decision to provide flexibility in the products where investors can park their corpus was also based on some malpractices in the market. In December 2014, the UK’s Financial Conduct Authority published the results of a market study that reviewed annuity sales practices and found evidence indicating that firms’ sales practices are contributing to consumers not shopping around and switching and firms failing to tell customers that other providers may offer enhanced annuities for medical conditions that they do not underwrite.