Expert panel, Irda to fix tax norms for insurance
Annuity plans offered by insurance companies have a risk component and a savings component which need to be distinguished if the tax treatment is to be altered.
By Hema Ramakrishnan, TNN |
PUNE: Annuity plans offered by insurance companies have a risk component and a savings component which need to be distinguished if the tax treatment is to be altered. Insurance and pension products are encouraged, the world over, to promote long-term savings.
Those investing in insurance and pension products look for gains at the end of about 20 years and after 30-40 years, respectively, while investors channelising their savings in mutual funds or bank deposits look only for short-term gains. This distinction has to be factored in before taking a view to tax withdrawals, reckon experts.
The panel, chaired by R Kannan, may hold deliberations with Irda to assess the implications of a change in the tax treatment for insurance products on the sector as a whole. Feedback from the regulator is reckoned to be crucial as the government plans to raise the FDI cap in insurance from the existing level of 26%. Consultations are likely to be held with the RBI.
Government-appointed panels have, in the past, recommended changes in the tax treatment for small savings instruments. The YV Reddy panel, for instance, held that ���the tax treatment for financial instruments having long-term maturity should differ from that of short and medium-term maturity, considering the special role of these instruments in promotion of long-term financial accumulation and social security���. It had recommended taxing withdrawals on long-term instruments like PPF at 10%.
Those investing in insurance and pension products look for gains at the end of about 20 years and after 30-40 years, respectively, while investors channelising their savings in mutual funds or bank deposits look only for short-term gains. This distinction has to be factored in before taking a view to tax withdrawals, reckon experts.
The panel, chaired by R Kannan, may hold deliberations with Irda to assess the implications of a change in the tax treatment for insurance products on the sector as a whole. Feedback from the regulator is reckoned to be crucial as the government plans to raise the FDI cap in insurance from the existing level of 26%. Consultations are likely to be held with the RBI.
Government-appointed panels have, in the past, recommended changes in the tax treatment for small savings instruments. The YV Reddy panel, for instance, held that ���the tax treatment for financial instruments having long-term maturity should differ from that of short and medium-term maturity, considering the special role of these instruments in promotion of long-term financial accumulation and social security���. It had recommended taxing withdrawals on long-term instruments like PPF at 10%.
Currently, individuals are allowed to claim a deduction up to Rs 1 lakh on contributions or subscriptions to specified savings schemes, including LIC premia, deferred annuity, PPF, subscription to savings certificates. A PPF accountholder is now exempt from paying tax at all three stages ��� contribution, accumulation and withdrawal. In technical parlance, this is known as the EEE method of taxation. Individuals, who invest over Rs 1 lakh in savings instruments, will have to pay tax on the extra amount of investments made over and above the ceiling.
The mandate of the Kannan panel is to provide a roadmap for a transition to the Exempt Exempt Tax (EET) method. Here, contributions and accumulations will continue to be exempt from tax, but withdrawals or benefits will be taxed.
Employees may need to open new PPF accounts, which will be distinct from their existing accounts. The panel is likely to examine the international experiences, particularly in Europe, in switching over to the EET system.
Most of the OECD countries have adopted the EET method of taxation in pensions.
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