Irda attempts to create investor-friendly insurance policy

Since life insurers have been seeking a separate income tax exemption limits, latest move to help promote insurance plans as tax-saving instruments

Insurance Regulatory and Development Authority (Irda) is looking at making insurance policies more investor friendly by introducing tax exemptions on insurance policies. While Irda is still considering a proposal by the Life Insurance Corporation to link the tax relief to term of the life insurance policy, media reports suggest that Irda has backed a move to introduce separate tax exemption limit on life insurance policies.

Recent reports said that since life insurers have been seeking a separate income tax exemption limit of Rs 50,000 for premiums, the latest move will help promote insurance plans as tax-saving instruments. Presently, investments in instruments like insurance policies, pension plans, provident fund, National Savings Certificates are eligible for combined deduction of Rs 1 lakh. The budget proposed that all insurance policies, except pension plans would have to offer a cover of at least 10 times the annual premium to be eligible for tax benefits under section 80C and 10 (10D).

 

It is to be noted that all these exceptions would not be valid under the present version of the Direct Taxes Code (DTC). The latest version of the DTC was released last year.

LIC Chairman D K Mehrotra had earlier told Business Standard, "We have recommended that rather than linking it to the sum assured, link it to the term of the policy. You can always say that a tax relief is given to a proposal where the term is more than 10 years." He had added that this would help the continuous flow of premium and the persistency will also go up. Other sector players including HDFC Life Insurance have said that the LIC proposal should be considered. 

Insurance industry players have said that though insurance policies offer low returns in comparison to other products, both the regulator and the finance ministry is trying to make it more investor-friendly by allowing tax exemptions. But, insurers explained that protection was the first goal of an insurance policy and investment came later. "Hence individuals need to be clear about what they want. If they want pure investment, then what needs to be kept in mind is that insurance may not be the best bet for them," said the chief executive officer of a private life insurance company.

The executive, however, added that the new proposal for introducing new tax exemptions separately for life insurance policies, the ministry and the regulator would certainly help in increasing the penetration of life insurance in the country.