The government may give a boost to the insurance sector in the upcoming Budget with a host of tax incentives.
Official sources told FE that in the Budgetary recommendations to the department of revenue, the department of financial services (DFS) has mooted the removal of service tax on micro-insurance, reduction of the service tax burden on life insurance premium, increasing the deduction limit to senior citizens and individuals for health insurance as well as a separate deduction limit of Rs 1 lakh under the Income Tax Act (I-T Act) for insurance premium.
At present, investments in insurance premium are included in the consolidated deductions under Section 80C (of I-T Act) for which the limit is Rs 1 lakh. Apart from insurance premium, the Rs 1-lakh limit includes investments in mutual funds, public provident fund and small savings among other things.
Pointing out that insurance is product that has to be ‘sold’ and therefore a ‘push’ product and not one which is ‘bought’ and thereby called a ‘pull’ product, the DFS has said that only a major incentive by way of a separate deduction limit will help in increasing insurance penetration in the country.
Insurance penetration had declined to 3.96% of gross domestic product in 2012 from 4.1% in 2011. The life insurance penetration as a percentage of GDP slipped to a paltry 3.17% in 2012 from 3.4% in 2011, while non-life insurance penetration increased marginally from a minuscule 0.7% in 2011 to 0.78% in 2012.
The DFS also suggested a reduction of service tax on the gross premium of life insurance policies.
From April 1, 2012, the service tax to be paid in the first year on the amount of gross premium of life insurance policies is 3% and 1.5% for the subsequent years (Prior to that it was 1.5% for the first and subsequent years).
The DFS has recommended a flat service tax of 3% for only in the first year and sought the removal of the 1.5% service tax in the subsequent years saying this is an additional burden and therefore a disincentive.
Life insurers can now avail the concessional rate in composite policies where the policyholder is not given the break-up of risk and investment components. However, where the policyholder pays the gross premium just for the risk-cover in life insurance, then normal rate of service tax – 12.36%- is levied.
The third suggestion is to