A Parliamentary committee apprehends an attractive new income tax regime may impact life insurance penetration and also investment fund.
“The committee is concerned that with the tweaks in the slabs and rates in the new tax regime, there might be decline in the life insurance penetration in the country as a major chunk of the population invests in life insurance products such as tax saving instruments, which is also the most important source of loanable/investment fund in the economy,” the Standing Committee on Finance said in its report on Demands for Grants of the Finance Ministry tabled in the Parliament.
As per the annual report of Insurance Regulatory and Development (IRDAI) for financial year 2021, the insurance penetration in the country stands at 4.2 per cent, as compared to global average of 7 per cent. It also mentioned that life insurance industry recorded a premium income of ₹6.93 lakh crore during 2021-22 as against ₹6.29 lakh crore in the previous financial year, registering growth of 10.16 per cent.
Also read: Double-whammy for life insurers on tax exemption limits, shift to new income tax regime
Introduced with effect from fiscal year 2020-21, the new Income Tax regime prescribes lower income tax rate in lieu of forgoing deductions against various allowances forming part of salary (eg. HRA, LTA, etc) and also for specified investments/ expenses such as premium paid on life insurance policy. Now with effect from April 01, the scheme has been made more attractive by raising the exemption limit to ₹3 lakh from ₹2.5 lakh and also the tax rebate on income earned up to ₹7 lakh from ₹5 lakh. Benefits such as standard deductions will also be available.
Strategy ahead
The committee enquired with the Ministry about the measures to be undertaken to ensure that life insurance penetration in the country does not dip due to the tweaks in the slabs and rates in the new regime which may result in taxpayers shifting from the old regime and which could possibly lead to a dip in the demand for the life insurance products as saving instruments.
In its response, the Ministry detailed strategy by Life Insurance Council. The council has stated that life insurers will focus on creating awareness on the importance of risk protection to increase the sale. Companies will focus on sale of affordable insurance products in Tier 2 and Tier 3 locations. In addition, emphasis would be laid on product innovation enabled through ‘Use & File’ facility provided by regulators.
“The ‘Use & File’ enablement provided by the regulator will allow insurers to offer innovative, simple and cost effective products. Further, the Sandbox infrastructure will be extensively used for testing innovative products offering, which when successful, can be offered to a larger customer base,” the Council said.
It also mentioned that insurers will be leveraging technology to bring in more policyholders. Technology will also be used to speed up claim processing and settlement thereby reducing turnaround times and boosting consumer confidence in life insurance products.
Earlier, the Ministry had said that the Government has taken various initiatives to enhance insurance penetration and coverage, especially for the underserved and unserved population of the country, through its flagship social security schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana covering approximately 15.42 crore lives, Pradhan Mantri Suraksha Bima Yojana covering approximately 32.78 crore lives, and Ayushman Bharat Pradhan Mantri Jan Arogya Yojana covering approximately 21.4 crore families, against life, accident and health risks respectively, as on December, 2022