On the anvil
New Delhi, Jan. 27: The finance ministry is planning to offer tax relief of up to Rs 50,000 on savings in pension and insurance products over and above the exemption of Rs 1 lakh under Section 80C of the income tax act.
The National Pension Scheme (NPS) and products approved by the Insurance Regulatory and Development Authority are likely to be made eligible for the new benefits.
According to current rules, all tax-saving schemes are lumped together under the Rs 1-lakh ceiling, offering no special benefits to pension and insurance products.
However, medical insurance has a separate tax-free investment window of Rs 15,000 under Section 80D in excess of Rs 1 lakh.
A separate investment avenue under 80CCF, which allowed exemption on investments up to Rs 20,000 in long-term infrastructure bonds, was scrapped last year. However, officials said there was still a need for long-term savings, and they would promote pension and insurance products to meet the requirement.
“The way out is to give tax-saving facilities on pension and insurance products,” officials said.
At present, India’s savings rate is about 33 per cent of the gross domestic product (GDP). The government wants to increase it to around 36-38 per cent by the end of the 12th Five-Year Plan (2012-17), with much of the incremental savings ploughed into long-term investments in infrastructure.
Pension and insurance funds are traditionally long-term investments, which can be shovelled into safe and long-term core projects.
One of the reasons behind China’s impressive growth is its high savings rate of nearly 50 per cent of the country’s GDP. Much of this investment has been in long-term instruments, which have funded highways, railways and skyscrapers. This is in contrast to India, which has been able to channel little money into infrastructure.
The government has been trying to pep up the insurance and pension sectors and has proposed to raise the FDI cap in insurance to 49 per cent from 26 per cent. However, the proposal has been held hostage by political wrangling between the ruling coalition and the Opposition.
The passage of a bill to set up a pension regulator and allow private investment in pension funds has also been held up.
Officials said tax deduction might also be permitted on total contribution to post-retirement medical scheme offered by insurance firms.
The finance ministry will also consider reducing service tax on first-year regular premium in insurance products, treating them on a par with contributions to the NPS.
The development follows intense lobbying by insurance and pension funds.
India has one of the lowest insurance penetration rates in the world with 4.4 per cent of its population covered by life insurance products compared with 9.5 per cent in the UK and 8 per cent in Japan.