The first-ever digital annual financial Budget was presented by Finance Minister Nirmala Sitharaman on February 1st 2021. The expected predictions relating to the annual financial budget carried the heavyweight of citizens' anticipations originating from the financial downfall in the economy that was prompted by the continuing global pandemic. While India has managed to handle this pandemic relatively well considering its population and medical infrastructure that was not in a good state even prior to this prevailing pandemic. Now, the most significant hurdle lies in sustaining the country's economy which was anyway explicating indications of slowdown even prior to the Covid-19.
In the year 2020, the government of India proclaimed a multitude of incentive packages to help falling industries and their workforce. However, the continuing global pandemic has stressed on the significance of health and life insurance as a mode of monetary safeguard for oneself and its family, restating the uncertainty of life-changing events. While there has been an enhanced recognition of insurance sector offerings amidst customers and citizens, especially for health and term life insurance. Various notable advances are made in this industry in relation to public consciousness and public assent of insurance industries that will continue to remain a potential sector in our Country.
How Union Budget 2021 will impact the insurance industry?
Recognizing the significance of various kinds of insurance to the infrastructure sector and the entire economy, the insurance sector was assured that various benefits will be granted in the annual financial budget. True to their hopes and assumptions, the Finance Ministry of India has made certain reforms, which the insurance sector will get assisted in generating a higher penetration and involvement from the citizens impacting the sector in a better way.
Hike in FDI limits
At the beginning of the Annual Budget speech in the year 2019, the finance minister had stressed on the Indian government’s intention to improve the Foreign Direct Investments (FDI) limit in the insurance sector. Although, there was no announcement made by the government thereafter on this matter. However, in the Union Budget 2021, there was a prolonged discussion on the liberalisation of Foreign Direct Investment in the insurance sector. It was further stated that the insurance companies should be granted the highest priority and this must be executed in this year’s annual Budget. Considering the present economic slowdown and uncertainty, the government has decided to raise the Foreign Direct Investment limit in the insurance industry to 74 per cent without emphasising on the condition of that insurance company being Indian regulated as this will assist in inducing more reliable technological expertise, modification and increasing insurance penetration, thereby expanding the attempts of the Indian government to strengthen the present sluggish economy.
Discrete tax deduction on the payment of life insurance premium
In the previous year's Union Budget, the finance minister proclaimed a novel arbitrary tax routine for the individual taxpayers wherein a more economical tax rates were proposed, and the taxpayers were expected to relinquish their claim of the reduction provided to them under section 80C of the Income-tax Act, 1961. Presently, under the tax slab of section 80C of the Income-tax Act, amidst other reductions such as remittance made against employee’s provident fund and many other deductions of this sort, the taxpayer can demand a deduction of life insurance premium with an all-inclusive limit Rs 1,50,000.
It is a well-known phenomenon that numerous individual taxpayers in the country acquire life insurance policies to claim a write-off under the Income-tax Act. Furthermore, the global pandemic has bolstered the requirement for adequate health as well as life insurance protection proffered the uncertainty of life. Hence, a discrete deduction of the health insurance premium is expected to be allowed by the government in the annual budget and the same can be claimed under the section 80D of the Income-tax Act. This deduction is further allowed to taxpayers even under the new optional tax administration. Acknowledging the expensive cost of health insurance premiums, the government will further revisit the limits that are presently available for demanding deduction of premium under section 80D of the Income-tax Act and update the same as per the prevailing market conditions.
Reduction in tax on earnings and gains
The earnings and profits from the life insurance sector are imputable to tax at the rate of 12.5 per cent per annum, As per section 115B of the Income-tax Act. This tax percentage of 12.5 per cent was prefaced in the year 1976 when the corporate tax percentages varied from 45 per cent to 65 per cent. In the year 2019, the government of India decreased the head corporate tax rate and brought it down to 22 per cent per annum (excluding cess and surcharge) for national companies and 15 per cent (excluding cess and surcharge) for upcoming or newly established manufacturing industries, subject to specific stipulations. In the present year 2021, the government of India has decided to revisit the corporate tax rates for the life insurance sector and reduce the same as it will hold a peremptory influence on profitability and cash flows of life insurance organisations.
To take on this prevalent flow there are certain modifications in the annual budget. The dominance and penetration of the insurance sector would progress further, particularly in Tier 2 and Tier 3 cities. Here are some major modifications that will impact the insurance industry.
1. Rise in Section 80C limit - This anticipation has continued to remain a much-demanded point since the previous few budgets. So, this year there is a lot of speculation that considering the economic effect of the global pandemic, the limit granted in the section 80C of the Income-tax act might be improved and that would for sure provide a stimulus to the life and health insurance sector and also the overall insurance industry.
2. Increase in the limit under Section 80D - Although the limit under this section 80D was improved to Rs. 50,000 in the previous budget, the increase was only for senior citizens. It is anticipated that this Union budget 2021 will enhance the limit of Rs 25000 under the section 80D of the Income-tax Act for regular taxpayers as well.
3. Incorporation of pension plans under Section 80CCD - The National Pension System (NPS) scheme relishes an added deduction of Rs. 50,000 under Section 80CCD (1B) of the Income-tax Act. This deduction has swayed the popularity of life insurance pension plans which are only covered under the Section 80C with a limit of Rs. 1.5 lakhs. In this year's annual budget, it is anticipated that the specific deduction under Section 80CCD(1B) of the IT Act would be extended to incorporate Life Insurance pension plans too and further raise their prevalence.
- Elongated carry forward for business losses
It is a widely regarded fact that insurance companies and particularly life insurance companies include a more extended maturity period vis-à-vis numerous distinct firms and still several of them remain to bear losses even after 10 years of their existence in the industry. Furthermore, the global pandemic has additionally worsened the monetary status of insurance and especially the life insurance sector. Taking all this into consideration, this year is the perfect time when the Indian government can concede an extended term of 12 years for the take forward of losses sustained by the insurance companies.
- Improvements for the non-life insurance industry
In the past year, non-life insurance organisations embraced the motion concerning the allowance of reduction for outstanding statutory accountabilities under section 43B of the Income-tax Act in the year of payment. But, non-life insurance companies were also anticipating a related measure concerning the allowability of expenditure in the present year for compliance with the delaying tax stipulations, excluding repudiation of the provision in the year of credit to profit and loss account which was previously disapproved. Non-life insurance corporations have anticipated that Budget 2021 would cater to such a measure and convey some clarity in their assessment mechanism.
The Indian branch of foreign reinsurers is probable that the Union Budget,2021 will own a Distinctive code of taxation, that is legitimate and unambiguous. Along with that, the method of receiving blanket NIL withholding tax certificates would be vindicated on comparable lines as currently applicable to Indian subsidiaries of international banks as mentioned in the Budget 2020.
While the concern linked to the process of receiving the blanket Nil withholding tax certificate has been settled in September 2020, the incertitude still prevails as to how such reinsurance subsidiaries would be taxable in India.
The Finance Minister Nirmala Sitharaman has recently presented a Union Budget like never before in the year 2021. This annual budget has brought in the much-required reforms that will further boost the Indian economy. The insurance industry can further receive a tax deduction on health insurance products by 5-6 per cent as this will assist in promoting the insurance coverage rate. It will further play a significant role in boosting the demand for insurance policies.