A new, simplified personal income tax (I-T) regime announced in Union Budget 2020-21 under which relatively lower rates will be applicable for taxpayers foregoing a host of deductions and exemptions is bound to impact popularity of life and health insurance policies.
Individuals opting for the new tax regime would be foregoing tax exemptions and “may end up spending money than use it towards their financial safety and security,” said managing director and CEO of Bajaj Allianz Life Insurance Tarun Chugh.
For long such policies, particularly life covers, are preferred as well as solicited on the strength of the accompanying tax breaks on the premium paid. All that is also likely to change with the new I-T regime. Sources among insurance intermediaries say no tax sops on the premium paid is bound to not only hit life insurance premium mobilisation, but also may lead to surrender of policies.
Almost all deductions available under Chapter VIA of the Income Tax Act, including Section 80C, 80CCC, 80CCD and 80D, will have to be given up as a prerequisite by those opting for the new I-T regime. Life insurers as much as their customers are likely to adopt a wait-and-watch approach.
Culture of savings
Deductions for the premium paid under Section 80C are believed to have inculcated in households a culture of consistent long-term savings. “We need to wait and observe what proportion of taxpayers opt for existing rates and how many opt for the proposed (new tax) rates and what effect it has on the savings culture of households,” said managing director of Kotak Mahindra Life Insurance Company G. Murlidhar.
Aditya Birla Sun Life Insurance CEO Kamlesh Rao said the insurance industry will be watchful of the implication of the direct tax changes in the new tax regime.
Noting that risk management through insurance is an essential part of nation building, IndiaFirst Life Insurance managing director and CEO R. M. Vishakha said in India, the construct has always nudged future savings and risk management through encouraging conscious investment towards the same aided by tax relief.
Other deductions
Besides those on insurance premium paid, the new IT regime requires taxpayers to forego several other deductions, including contributions made to charitable institutions under Section 80G; expenses on rehabilitation of handicapped dependent (80DD); medical expenditure on self or dependent relative (80DDB); interest on education loan (80E); and interest on home loan (80EE).
“Our initial analysis suggests it is beneficial for taxpayers to continue investment in life insurance policies for claiming tax exemption under Section 80C of I-T Act as it would be beneficial with less tax outflow in the year in which premiums are paid,” said managing director and CEO of Max Life Insurance Prashant Tripathy.
