News 290 views February 6, 2020

Know Actual Impact of New Tax Pattern on the Life Insurers

The Finance Ministry of India has declared a new and distinct Income Tax pattern in the Union Budget 2020. According to this new pattern, new tax rates have been announced for those individuals who have an annual income of up to Rs. 15 lakhs in a year. These new Income Tax rates will be optional and will be applicable only for those individuals who are ready to forego certain tax exemptions and deductions. An individual can select the new tax pattern or can continue with the old one but the new tax regime has a larger number of concessions associated with it.

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The new Income Tax rates have been announced under Section 115BAC of the Income Tax Act, 1961. For availing the new tax rates, individuals would have to forgo a large number of tax exemptions and concessions which are present under Section VI-A such as Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E,80EE,80EEA, 80EEB,80G,80GG,80-IB,80-IA,80-IAB,80-IBA, etc. But, certain tax deductions such as deductions under sub-section (2) of Section 80CCD and Section 80JJAA can still be claimed. These sections include tax deduction on the contribution made by an employer on behalf of the employee towards Notified Pension Scheme and tax deductions based on new employment.

The tax deductions present under Section 80C and Section 80D of the Income Tax Act, 1961 are the quite commonly available tax deductions including investments that are made into Provident Fund, NPS, health insurance premium, standard deduction, etc. With these major changes being proposed by the Finance Ministry into the Union Budget, according to some analysts, the Insurance sector seems to be the most affected ones as the main reason for the purchase of insurance is to avail the tax benefits.

By the proposal of removing tax exemptions from the purchase of insurance products, a very strong message has been conveyed to the insurance providers. The insurance providers should now focus on the sale of savings and protection insurance products rather than completely depending upon the sale of tax-exempt instruments. The tax exemptions on the income obtained on the tax dividend have also been removed and this is going to affect the margins and embedded value. Also, tax advantages are currently available for the premium on all insurance products but there is some risk factor associated with ULIPs as they are highly motivated by tax benefits.

However, for many analysts there would not be much impact on the growth of the insurance providers since the alternate tax regime does not provide many benefits to those who are having an annual income more than Rs. 15 lakhs or the ones who tend to claim a major part of the Section 80C/HRA or standard deduction. Moreover, some other analysts do not find the provisions too stringent and are optimistic about insurance sales.

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