The Union finance ministry is considering a proposal to link tax exemption of life insurance policies to the term of the cover, rather than the sum assured.
The suggestion was mooted by government-owned Life Insurance Corporation of India (LIC).
The largest life insurer has sought that premiums be linked with the term of a policy and any of 10 years or more should get the exemption.
Currently, tax relief is linked to the sum assured. Under the present system, 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 sections 80C and 10 (10D) of the income tax rules. Earlier, insurance policies with a sum assured of five times the annual premium used to get the tax benefit. Section 80C allows exemption up to Rs 1 lakh and 10 (10D) gives exemption in maturity proceeds.
Insurers have been arguing that the present system would raise premiums, particularly for customers in the higher age groups as they opt for lower term policies where the mortality rates are higher.
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“This is a taxation issue. We have recommended that rather than linking it (tax benefit) 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,” said D K Mehrotra, chairman of LIC, adding this would help the continuous flow of premia.
He said under the present system, people in the higher age brackets would be left out. “So, rather than linking it with the sum assured, link it with premium paying term, so that a person of any age can go for it. If someone wants a tax rebate, he would go for a policy that has a term of more than 10 years.”
Under the present norms, the higher mortality charges inflate premiums. Similarly, as the sum assured increases, it raises the risk cover.
This impacts the premiums. Therefore, the premium would come down if linked to the term of the policy.
“The ministry is looking at some of the suggestions. Another suggestion is to take it back to the earlier five-times norm,” said an insurance official working closely with the ministry.
Relief on insurance policies would be a needed boost for the sector, as it is just looking up after facing a severe slowdown in the past two financial years. In 2011-12, the life insurance sector’s policy issuance was down by eight per cent. It was down by 24 per cent for private companies.
As a result, the first-year premium collection was down by nine per cent to Rs 114,233 crore against Rs 125,826 crore in the corresponding period last year. However, in April-June of the current financial year, the sector recorded a six per cent jump in new business collection, to Rs 19,452 crore.