Insurance and Tax Benefits in Budget 2012
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As per the Direct Tax Code recommendations for the 2012-13 Union Budget, there will be an extra reduction of INR 50 thousand for covering life insurance and health insurance premiums. However, for the life insurance programs to be eligible for this benefit the premium should not be more than 5 percent of the sum insured.
There have also been recommendations to further increase the exemption limit to 1 lakh rupees – life insurance policies, with premiums lesser than or equal to 10 percent of the sum insured should also qualify for the exemption.
A different deduction of 20 thousand rupees has also been suggested for medical insurance programs being availed by senior citizens. The Union Finance Ministry has also recommended that the reimbursement as well as payment of medical insurance premium be totally exempted from taxes. As per the existing laws, it is regarded as a taxable benefit.
Union Budget 2012 and Life Insurance
After the recommendations of the 2012 Union Budget, life insurance policies will lose their viability as a retirement fund. On the flipside, health insurance programs will become more economic than before with pre-acceptance medical test payments qualifying for tax breaks.
The Union Finance Minister has increased the minimum cover requirement level for life insurance policies by 200 percent as far as eligibility for tax deductions are concerned.
As per the changes to eligibility limits for tax exemption, the sum assured-to-premium has been increased to 10 times from the previous limit of 5 times. These exemptions are available as per the Sections 10 (10D) and 80C of the Income Tax Act. This change is in line with the Direct Tax Code proposals that look to increase the levels of insurance being provided by the life policies.
For example : Best Selling 15 year option of Jeevan Surabhi plan won't get tax benefit
| For a Cover of Rs. 1 Lakh | |||
|---|---|---|---|
| Age | 15 year plan | 20 year plan | 25 year plan |
| 30 years | 10672(No Tax Benefit) | 9130(Tax Benefit) | 8145(Tax Benefit) |
| 35 years | 10963(No Tax Benefit) | 9581(Tax Benefit) | 8776(Tax Benefit) |
| 40 years | 11433(No Tax Benefit) | 10279(No Tax Benefit) | 9687(Tax Benefit) |
| 45 years | 12156(No Tax Benefit) | 11293(No Tax Benefit) | 10943(No Tax Benefit) |
Under the new rules, a major portion of the premium will be diverted towards the life cover and this will make the life insurance policies less profitable than before. The Secretary General of the Life Insurance Council, SB Mathur, though, has welcomed the budget proposals on insurance in relation to the Direct Tax Code.
LIC officials are of the opinion that the senior citizens will now find it tougher to avail life insurance policies. Bhargav Dasgupta, the MD of ICICI Lombard, has welcomed the tax break of INR 5000 being provided for precautionary health check ups. According to him, this will increase the focus on such form of treatment.
General insurers are saying that this change will enable diseases and other physical problems to be detected earlier. Shashwat Sharma, a KPMG partner, opines that this could also lead to creation of new products in the health insurance sector and thus more options for the people.
Tax Planning in 2012-13: Alternatives
Leading economic experts across India have asked tax payers to go about methodically with regards to their tax planning and to start the process from the beginning of the fiscal itself as that will provide them with all the benefits of a long term investment.
Public Provident Funds – As per rules, investments in Public Provident Funds (PPF) are included the Section 80C limit of INR 1 lakh, which is an improvement from the previous level of 70 thousand rupees. The PPFs are also providing an interest of 8.6%. But the investors need to remember that the minimum yearly investment limit is 500 rupees and the money is not available before 15 years.
Employee Provident Funds – This form of investment is applicable for the salaried professionals. In this case, the EPF is deducted on a mandatory basis and the contribution qualifies for tax benefits as per Section 80C of the Income Tax Act. The EPFs provide approximate yearly returns of 8.5 percent.
Tax Saving Mutual Funds or Equity Linked Saving Schemes – The tax saving mutual funds and equity linked saving schemes are ideal for taxpayers who have not yet been able to make the maximum investment permissible as per the Section 80C of the Income Tax Act and cannot also put their money in other tax saving instruments.
The investors in ELSSs need to remember that these have lock in periods of 3 years and are traded in the share market which implies that there can be a fair bit of risk factor involved.
The recent Direct Tax Code recommendations, though, have not made it clear whether these will remain eligible in the future for tax benefits as per Section 80C and the investors need to be aware of the tax implications while making a decision in this regard.
5-Year Fixed Deposits in Banks – These investment instruments are eligible for tax deduction according to the Section 80C of the income tax code. At present, the fixed deposits are providing an interest of approximately 9%. The investors though need to remember that they will have to pay taxes on the maturity value of these, which effectively reduces the returns by some extent.
SCSS and NSC – There have been some changes to the National Savings Certificates in 2012. The term period has been brought down from 6 years to 5 years and their performance is now connected to the government returns. A new NSC with term period of 10 years is also being considered.
As of 2012 these are providing interest rate of 8.4 percent but the income will be taxable on maturity just like the 5 year bank FDs. The returns on the SCSS (Senior Citizen Savings Scheme) are linked to the market as well and these investment instruments will provide a yearly interest rate of 9 percent.
Senior citizens, older than 60 years, will be able to invest a maximum of INR 15 lakh in the SCSSs that have a lock in period of 5 years and provide quarterly payouts.
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