Anticipating an adverse impact of the new Direct Tax Code, life insurance companies have demand amendments in the proposed code. The draft code had recommended a maturity tax on all life insurance products, if the term was less than 20 years and the premium exceeded 5 per cent of the sum assured.
At present, there is no tax if the sum assured is five times the premium on all maturities. In a presentation to the finance ministry, the Life Insurance Council, the representative body of all life insurance companies, has recommended that all policies with a tenure of 10 years or more should be treated as long-term investment and be exempted from taxes.
First, we want insurance policies, which do not qualify for exemption at the time of investment to be treated as capital assets like mutual funds and should get the benefit of indexation, said Life Insurance Council Secretary General SB Mathur.
Insurance is the most popular instrument for saving tax under Section 80C of the Income Tax Act. Investment up to Rs 1 lakh is not taxed. But the maximum tax benefit allowed on insurance premium for any insurance policy except annuity is fixed at 20 per cent of the sum assured.
The councils recommendation is to treat investment above the limit of exemption under the capital asset class. Second, the code proposes maturity tax benefit on a 20-year policy if the premium does not exceed 5 per cent of the sum assured. Mathur said that the council has recommended increasing the premium to 10 per cent and reducing the tenure of the policy to 10 years.
The code has defined long-term investment as 20 years. This should be brought down to 10 years and policies maturing after 10 years should be subject to income tax benefit, said Mathur.
This meant that direct tax code would only benefit the higher income group as any sum received at maturity under a life insurance policy, including bonus, would be taxed if the premium did not exceed five per cent of the sum assured. All existing unit-linked insurance plans, endowment and money back and guaranteed return plans would take a hit.
Tax benefit is extremely important for insurance products as 40 per cent of total sales takes place during the last quarter and 20 per cent in March. This shows that tax benefit is important for insurance and the government should be cautious in bringing changes in tax, said IDBI Fortis Managing Director and Chief Executive Officer GV Nageswara Rao.