IRDA for tax sops on pension, policyholders surplus

NEW DELHI: Voicing the concerns of insurers, the Insurance Regulatory and Development Authority (IRDA) has asked the government to reduce tax rate on policy-holders surplus to three per cent and exempt pension schemes for the unorganised sector in the Budget.
IRDA chairman N Rangachary has also written to Finance Ministry demanding tax deduction on the amount general insurance companies intend to set aside for building a catastrophe fund.
"The industry is concerned about the tax structure. I have recommended to the Finance Ministry to reduce the tax rate on policy-holders surplus to three per cent from the present 12.5 per cent as suggested by the Eradi Committee," Rangachary said on the sidelines of a Ficci seminar here on Thursday.
He said the higher tax rate was relevant earlier when the personal income tax rates were as high as 60 per cent. "The income tax rate has come down over the years but the tax rate on shareholders'' surplus is still higher," he added.
The high tax rate results in lower return to policy-holders, especially at a falling interest rate regime.
If the government does not reduce the tax rate, it would indirectly result in lower returns to policy-holders.
The IRDA chief, who is slated to retire on June 9 this year, said the government can continue to tax the shareholders surplus at the existing corporate tax rate of 30 per cent.
In his letter to the Finance Minister''s advisor Vijay Kelkar, Rangachary proposed that the Centre can come up with tax-saving bonds long-term 30-year bonds exclusively for pension funds.
"Instead of meeting the entire social security bill, the government can partially compensate the interest obligation," he said.
The IRDA Chairman said that falling interest rate and rising longevity of Indian population was putting strain on the pension funds and insurers.
The authority had mooted "pension bonds" in line with small savings certificates, that could be bought at Rs 100 per unit at any point of time. But the idea never fructified.
Rangachary said IRDA had written to the Reserve Bank to come up with longer dated papers for the benefit of insurers and pension funds as there was a dearth of government securities beyond 26 years.
However, the RBI was sceptical in floating such papers as it might be difficult to service them in a falling interest rate regime. Even in the event of a rise in interest rates, there might not be any buyers of low yielding long term bonds.
IRDA has also asked the government to exempt the funds that could be set aside for building the Catastrophe Fund.
The need for building up such a fund was felt after the Gujarat earthquake two year ago and again after the surge in reinsurance premium following terrorist attacks in the US and India last year.
In the absence of a tax sop, insurers were unwilling to build the fund which could have been utilised in meeting claims in the event of natural calamities like earthquake.
The proposed fund could also provide a cushion to Indian insurers in the event of war, when the reinsurance becomes costly.
Speaking at the conference, former Finance Minister P Chidambaram said there should be at least one or two long-term investment instruments till the government put in place a social security net.
He favoured continuance of the tax rebates on savings as against the Kelkar Task Force suggestions of lifting them completely.
In this context, he said if the government caps the investment limit or reduces interest rates on tax-free saving instruments like RBI Relief bonds, it would result in decline in household savings.
Since agriculture was slated to be the main profession of the majority of Indian population, tax sops on small savings should continue, he said.