Level playing field must for NPS, life insurers’ pension policies

The Budget should look at providing a level playing field — tax parity between the popular National Pension System (NPS) and the pension policies issued by life insurance companies, Tarun Chugh, Managing Director & CEO, Bajaj Allianz Life Insurance, said.

Tax advantages available to an individual who contributes to NPS should also be extended to individuals buying a pension policy issued by life insurance companies, Chugh told BusinessLine . Though both the products cater to the common objective of the individual customer, NPS has a significant edge over pension products of a life insurer due to the tax advantage it enjoys. This makes NPS a more attractive investment option, he said.

Sample this statistic: In 2017-18, NPS contribution stood at ₹1,81,066 crore, up 36 per cent over ₹1,33,165 crore in the previous fiscal. On the other hand, pension plans premium for insurance sector in 2017-18 stood at ₹58,277 crore, up 1 per cent over ₹57,490 crore in the previous fiscal. Sales of pension products offered by insurance companies have been muted as opposed to NPS. .

Rationalise GST rates

In view of the low penetration of life insurance in the country, which stands at 2.8 per cent as of FY2018 (as per IRDAI) and how under-insured India is (India’s Protection Gap as of FY2014 stood at 92.2 per cent, as per Swiss RE, Economic Research and Consulting 2015), Chugh said that GST rate on life insurance services should be reduced (from the current level of 18 per cent).

“While this would have a small and temporary reduction in Government’s tax revenues, the benefits flowing to the middle income group and the impetus in growth in demand will far offset the reduction,” he said.

A reduction in the tax rate on life insurance services will encourage a healthy market coupled with a higher rate of growth in demand for life insurance products, according to Chugh.

Tax exempt annuities

Chugh also suggested that all annuities from a pension/annuity contract be made tax-free.

Alternatively, while computing maturity proceeds from an annuity, premium amount paid with respect to keeping the annuity in force should be reduced as this amount simply represents the principal amount originally paid by the policyholder and hence only the amount of accretion i.e. interest be taxed as per the tax rate applicable to the policyholder.

Currently, the commuted amount received from pension fund established by insurance companies is partially exempt from tax. On vesting of the policy, the policyholder can currently commute up to one-third of the policy proceeds which is received tax free. The balance two-thirds of the pension fund is converted to an annuity policy and annuity is taxable.

However, in the case of Provident Fund, the entire withdrawals are exempt from tax, even though both products are meant to encourage long-term savings to provide security at old age.

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