Pension reforms for unorganised sector likely

NEW DELHI: Finance Minister Jaswant Singh is likely to trigger off pension reforms for the unorganised sector in this Budget by exempting tax on a standardised pension policy which could be sold by insurers at a meagre price.
The Insurance Regulatory and Development Authority has developed a “standardised� pension policy and sought complete tax exemption on it, as majority of the population in the unorganised sector was out of the tax net, official sources said today.
IRDA has already conveyed to the Life Insurance Corporation and all private players about the policy, which is likely to be launched in April, sources said. The new pension policy is likely to be priced at a premium as low as Rs 100 annually and may be indexed with the inflation rate.
The government is also planning to bring in two new bills on social security of which one would be for the unorganised sector. This will enable the Employees Provident Fund Organisation to come up with pension schemes for the economically weaker sections. — Agencies
Sources said an announcement on these bills is expected in the Budget.
Meanwhile, IRDA has also asked the finance ministry to reduce the tax rate on policyholders’ surplus from 12.5% to 3% as suggested by ERADI committee. IRDA chairman N Rangachary said last week that a high tax rate of 12.5% was relevant when the personal income tax rates were as high as 60%. The income tax rates have come down over the years to a maximum 30% but the tax rate on shareholders’ surplus is yet to be reduced.
In a letter to the finance minister’s advisor Vijay Kelkar, IRDA had also proposed that the Centre can come up with a tax-saving 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 on these bonds, Mr Rangachary said expressing concern over the strain that insurance companies were facing in the wake of falling interest rates and rising longevity of Indians.
IRDA has also asked the government to exempt the funds that could be set aside for building a catastrophe fund. 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 a war, when reinsurance becomes costly.