The Life Insurance Corporation of India has made a strong case for continuing tax breaks on life insurance policies bought with an investment objective. Referring to the Direct Tax Code proposal that extends tax-breaks to only those policies that have a sum insured of at least 20 times the premium paid, LIC chairman TS Vijayan said the important thing was that life insurance investments were long-term and protection-oriented.
Describing the prescription of the minimum level of insurance cover as artificial, Mr Vijayan said this does injustice to the industry that has provided “solid support” to the economy.
In terms of the new DTC, the maturity benefits of insurance policies that do not have the prescribed level of insurance will be taxed.
While DTC withdraws tax breaks from policies that are primarily used for investment rather than protection, it has also withdrawn the 12.5% tax that funds of traditional policies are subjected to. “Following the withdrawal of the tax, we should be able to pass on `2,800 crore to policyholders by way of higher bonuses,” said Mr Vijayan.
The life insurance industry is highly upset with the new DTC proposal because it would mean that unit-linked insurance plans will be taxed in the same way as mutual funds despite their being long-term products. “How many instruments are there that have managed to support the economy during a global financial crisis,” said Mr Vijayan, referring to the corporation’s ability to continue investing in markets when all other investors, including foreign institutional investors and mutual funds were net sellers. “I keep being asked by the media, how much do we plan to invest? The answer to that — it depends on the choices made by the policyholder. This year, if the policyholder continues to see long-term benefits, we expect to invest `2 lakh crore,” said the LIC chief.
Later in his speech, finance minister Pranab Mukherjee said LIC contributed 1.84% to the country’s gross domestic product and he hoped that this would increase to at least 2% of the gross domestic product. The chairman of the country’s largest financial institution said the insurance industry was one of the largest supporters of infrastructure finance and also played a role in financial inclusion. “The definition used by the insurance regulation to describe a rural customer is more stringent than defined by others. It includes only those in villages with a population of below 5,000.”
Long term investment should be encouraged by govt.And should not remove the exemption.