Budget likely to give a push to pension reforms

Freny Patel

The 2002-03 Union Budget is expected to push for pension reforms. The government is likely to double the tax benefit available under Section 80 ccc (i) to Rs 20,000 for investments under pension plans.

Currently, Section 80 ccc (i) allows deduction from gross income for any annuity plan up to a maximum ceiling of Rs 10,000. The industry has urged the government for a much higher tax deduction limit of at least Rs 50,000.

The industry also expects the creation of a sub-limit under Section 88 for insurance and pension products in an effort to attract more long-term savings.

The issues came up for discussion in the pre-Budget meeting of the finance minister with financial institution heads.

The other proposals pertaining to the insurance sector that are likely to be introduced in the budget are the necessary amendment in the corporate agency regulations. It is expected that the compulsory 100-hour training and examination for all directors of the corporate agency will be done away with.

Said HDFC Standard Life managing director Deepak Satwalekar: "I'm bullish on pension reforms in terms of the tax benefit. The government has to give higher incentives to individuals saving for long-term as the country is in need of long-term funds to meet the infrastructure development needs".

The government is keen to do away with a host of tax benefits in the budget. However, insurance players point out that these should be done away with for short-term savings. "Tax incentives should exist, but be restricted and directed to infrastructure and long-term savings products such as retirement benefits," they stated.

Infrastructure projects offering three-year paper are not feasible either for the infrastructure sector or for investors looking at long-term investment options. Insurance companies that have come out with pension plans expect the government to introduce more long-term paper as they could face asset-liability mismatches.

The Insurance Regulatory and Development Authority of India and the Reserve Bank of India have urged the government to come out with longer-term paper of at least 30-year maturity.

Eighty-five per cent of the two recent tranches of 25-year government paper was mopped up by the Life Insurance Corporation of India, which is investing more than 65 per cent of incremental funds in the current fiscal in the government securities market.

The recommendations made by the V U Eradi (Tax) Committee in its report submitted prior to the last budget are also expected to be implemented. Currently, LIC is taxed at 12.5 per cent on its valuation surplus.

However, as new companies would not be making any surplus for at least five to seven years according to their respective business plans, the government has to take this into cognizance before taxing the companies, states the report.

New companies nevertheless, would have to put in shareholders' funds into the life fund to take care of any liabilities. Insurance companies thus feel that the Income Tax Authority ought not to take this as profits and hence not be taxable.

Insurance companies are currently restricted to sell their products solely through the direct agency channel. SBI Life Insurance Company is unable to capitalise on State Bank of India's branch network. Many of the other new companies have also signed memorandum of understanding with private, public sector and foreign banks. Few have however, been able to use the network of bank branches.

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