In the run up to Budget 2007-08, life insurance industry has submitted a proposal to the finance ministry to change the tax treatment currently being given to life insurance industry. The most important proposal is a separate tax treatment to long term products says SV Mony, secretary-general, Life Insurance Council: “It is unfair to put the entire range of investments, long-term as well as short-term under one section, 80C. The council has suggested two options — either divide Section 80C into long term and short term wherein up to Rs 50,000 is kept for long term products or make another section under which all investments done over a period of 7 to 10 years is given separate tax treatment.” Under the Income Tax Act, Section 80C defines certain classes of investment vehicles like equity linked savings scheme, Public Provident Fund and life insurance as tax deductible and therefore any investment made in any of these instruments is exempt from tax up till a limit of Rs 1 lakh; the limit for PPF is Rs 70,000. Premiums paid towards life insurance policy are also tax deductible upto a maximum of Rs 1 lakh but it remains a sore point with the insurers as they do not like to see themselves being clubbed with other investment vehicles since 15 per cent of this investible surplus is directed towards funding infrastructure projects. Says Gaurang Shah, Managing Director, Kotak Life Insurance: ”Long-term resources are required for two reasons — to fund long term projects like infrastructure and to strengthen the Indian institutional. And in achieving both these targets, I see insurance as a prominent vehicle since we hold investments for long term.” Hence, the to have separate tax treatment for long term products so that people don’t just look at exhausting their Rs 1 lakh limit but are encouraged to save for long-term. The other proposal is to increase tax deductions on health insurance from Rs 10,000 to Rs 30,000 says Mony: “One the one hand we are asked to encourage medical insurance and on the other the tax exemption is so less. We have proposed to increase this limit to about Rs 30,000.” As of now under section 80D premiums paid towards medical insurance are deductible upto Rs 10,000 and Rs 15,000 for senior citizens. The industry has also proposed to retain tax exemptions on maturity proceeds given under section 10(10)D but to do away with the minimum sum assured limit. Currently, the sum assured should be five times the premium paid for a policy holder to get the exemption. Says Mony: “The idea is to enforce a minimum sum assured which the new guidelines on ULIPs have been able to do. This limit is then redundant.” Among other things, the industry has proposed to do away with the fringe benefit tax levied on group superannuation schemes.
