IRDAI asks finmin to fix tax anomalies in annuities

MUMBAI: The government's proposal to tax Employee Provident Fund ( EPF) nudges savers into buying annuities, which yield a lower return than government bonds or tax-free bonds. The Insurance Regulatory and Development Authority of India ( IRDAI) has written to the government highlighting some of the anomalies that come in the way of insurance companies offering better return on annuities.

The Budget proposes to tax 60% of the proceeds of the EPF at maturity. However, this tax can be avoided if the employee chooses to buy an annuity from a life insurance company. An annuity is a plan where the investor receives a steady stream of income against an upfront payment. Today, the biggest downside of buying a pension plan is that the annuity returns are not comparable with tax-free bonds or even government bonds.

Take, for instance, Jeevan Akshay VI annuity plan purchased from LIC for 15 years on retirement with a return of premium. The yield on this is around 7.11%. Compared to this, purchasing a government bond of equivalent tenure would generate a yield of close to 8%. Hudco's tax-free bonds which were on sale this week offered a return of 7.69% on 15-year bonds. Also, the amount paid out by way of annuity is taxable.

The IRDAI, in its letter to the finance ministry , has said that any individual who buys an annuity policy ends up paying service tax on the purchase price.

This is not the only anomaly. When an individual saves towards a pension plan under a life insurance pension plan, the tax breaks are part of the Rs 1.5 lakh relief under section 80C of the Income Tax Act. This section encompasses all possible savings including EPF , long-term bank deposits, principal repayment on home loan, tuition fees and life insurance premium. Most individuals more than exhaust their headroom under 80C. But contributions to the NPS gets additional tax breaks of Rs 50,000 outside 80C.