Financial Daily from THE HINDU group of publications
Thursday, Jan 09, 2003
Money & Banking
Regulatory Bodies & Rulings
Industry & Economy - Income Tax
IRDA for more tax sops to encourage savings
HYDERABAD, Jan. 8
WITH the Kelkar Committee not budging much on the tax incentives for savings, the Insurance Regulatory and Development Authority (IRDA), has asked the Government to consider extending significant tax sops to encourage savings.
Recommending a comprehensive systemic reform initiative to attain the objectives of pension reforms, the insurance regulator made it clear to the Government that the country's "present tax treatment of contractual savings is currently inconsistent."
Senior IRDA officials told Business Line that the tax structure proposed by the insurance regulator stressed on incorporating significant tax incentives to encourage savings. According to them, the regulator advised a modified method of taxation where contributions towards pensions were made from taxable income.
Apart from advising the Government to exempt the income of the pension funds and annuity funds from tax, the IRDA suggested continuing exemption of the commuted value of pensions from tax and also exempt the amounts received as annuities from tax. Further, according to the IRDA officials, the regulator recommended that long-term savings be accorded a preferential tax treatment.
The proposed pension system suggested by the insurance regulator was envisaged as a purely voluntary one with both participation and contributions being voluntary. The system was primarily aimed at the unorganised sector that was presently not covered under any of the existing pension schemes. The proposed system also ensures an organisation that has interface between the contributors and the pension regulator.
While emphasising on low and clear charges to enable customers to compare easily the different plans, the insurance regulator placed emphasis on competition through a system of multiple providers so as to ensure minimisation of costs and optimise fund management and customer service, the IRDA officials said.
Suggesting a system to regulate the providers and products as well as the selling process, the insurance regulator told the Government that the objective was to reduce costs and complexity while maintaining security of peoples' funds.
According to the insurance regulator, the link between pension reforms and the insurance markets take place both within the annuity portion of the old age scheme and potentially in the areas of survivors and disability benefits.
"The ability of the insurance sector could effectively provide annuity coverage in these instances and this could eventually prove crucial in determining the success of the pension reforms."
Opposing the facility of frequent withdrawals, the IRDA advised the Government that the very purpose of institutionalising the pension system of accumulations would be lost by withdrawals.
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