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In forthcoming budget, Insurers seek separate tax exemption limit for life policies
February, 17th 2011

The insurance industry wants the government to create a separate tax exemption limit of Rs 50,000 for life insurance premium in the forthcoming budget to encourage more individuals to buy such policies.

"It is suggested that a standalone additional exemption limit of Rs 50,000 (over and above the already existing limit of Rs 1,00,000) be specified for (life) insurance premiums alone under the Income Tax Act," Canara HSBC OBC Life Insurance Chief Financial Officer Anuj Mathur said.

Currently investment in saving instruments, like risk cover, pension products, PF contributions, National Savings Certificates and others, are eligible for aggregate deduction of Rs 1 Lakh.

Besides, investments in infrastructure bonds up to Rs 20,000 also qualify for deduction.

"We recommend a separate limit for tax exemption for long-term saving instruments like life insurance or increasing the limits on life and health insurance premium could be looked at," Max New York Life Insurance MD & CEO Rajesh Sud said.

Industry experts said changing lifestyle made necessary an assurance for future income generation, thereby increasing the need for a life insurance policy.

Mathur said in order to ensure better insurance penetration, the life insurance companies should be allowed to come under the Exempt, Exempt, Exempt (EEE) bracket.

Under EEE, a policy holder gets tax exemption at various stages during the term of the policy.

Insurance sector needs capital on a periodic basis for expansion and experts hope that the budget session would also see passage of FDI Bill in insurance sector to 49%, from the current 26%.

"There is a need for more proactive regulatory architecture for insurance. Foreign insurers could be allowed to set-up under a wholly owned subsidiary with 100% FDI. The life insurance industry is very capital intensive and companies need huge capital to fund growth," KPMG Executive Director Naresh Makhijani said.

The life insurance companies currently pay tax of 12.5% and the Direct Taxes Code, which would replace the archaic IT Act from April 1, 2012, does not specify any specific limit for the same. This would mean being taxed at 30%.

"A significant portion of funds of life insurance companies are invested in infrastructure projects. ALso companies incur huge losses initially due to long gestation period. With higher tax rates, it will be unattractive proposal for new investors to invest in the sector," Max New York Life's Sud said.

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