Income Tax 03 Feb,2020
Budget Insights for Insurance Sector
Bahroze KamdinPartner with Deloitte India
ALIFYA HAKIMSenior Manager with Deloitte Haskins and Sells LLP
Megha GalaManager with Deloitte Haskins and Sells LLP

Growth in the insurance Industry as per the Economic Survey for FY 2019-20

Insurance penetration for life insurance has declined from 2011 whereas for non-life it has increased consistently (in 2018 Life is 2.74% and Non- Life is 0.97%).

The insurance density in India which was US$11.5 in 2001, reached to US$74 in 2018 (Life-55$ and Non-Life -19$).

During the fiscal 2018-19, the gross direct premium of general insurers (within India) was Rs.1.69 lakh crores as against Rs.1.51 lakh crores, in 2017-18 registering 12.47% growth due to growth in Motor, health and others segments of insurance industry.

Life insurance industry recorded a premium income of Rs.5.08 lakh crores as against Rs.4.59 lakh crores in the previous financial year, registering a growth of 10.75%.

There are 19 entities in Insurance sectors in the International Financial Services Centre (IFSC) in GIFT city.

Major Policy Initiatives

  •  Social security through insurance penetration is aimed to be achieved through digital revolution. Initiatives in this regard and their components would be bench-marked to international standards and the indices which would be announced soon.

  •  Deposit Insurance and Credit Guarantee Corporation (DICGC) has been permitted to increase Deposit Insurance Coverage for a depositor, which is now Rs.1,00,000 to Rs.5,00,000 per depositor.

  •  To achieve higher export credit disbursement, a new scheme, NIRVIK is being launched, which provides for higher insurance coverage, reduction in premium for small exporters and simplified procedure for claim settlements.

  •  Export Credit Guarantee Corporation (ECGC) will expand the scope of Export Credit Insurance Scheme (ECIS) to offer higher insurance cover to banks lending working capital for exports.

Major Tax Reforms

The key tax changes and not all changes proposed in the Budget 2020 relevant or having implications to insurance business is discussed hereunder

  •  It is proposed to amend section 72AA of the Income-tax Act to allow carry forward of accumulated losses or unabsorbed depreciation of the amalgamating company in the hands of the amalgamated company in the case of amalgamation of government insurance companies under a scheme sanctioned and brought into force by the Central Government under section 16 of the General Insurance Business (Nationalization Act),1972. This is applicable from AY 2020-21.

  •  It is proposed to amend Rule 5 of the Frist Schedule to the Income-tax Act by inserting clause (d) to provide that, in computing the profits of general insurance business, any expenses disallowed in the hands of the general insurance company for late payment of statutory dues under section 43B shall be allowed in the year of payment. The amendment is applicable from AY 2020-21.

Section 44 of the Income-tax Act is a special provision dealing with the computation of profits and gains of business of insurance. It being a non obstante provision, prevails over other provisions in the Act. It provides that income from insurance business should be computed in accordance with the Rules contained in the First Schedule to the Act. Per Rule 5 of the First Schedule, the business profits of a general insurance company shall be taken to be the profits per financials (prepared pursuant to the regulations / guidance issued by the Insurance Regulatory Development Authority (IRDA)) subject to certain specified adjustments (provided in clause (a) to (c) therein). Rule 5(a) refers to adjustments for amounts to be disallowed under section 30 to 43B of the Act, Rule 5(b) deals with taxability / deductibility of gain / loss on investments and Rule 5(c) deals with the deductibility of unexpired risk reserve (URR).

As per the provisions as it currently stands, there is no specific provision in Rule 5 for allowing deduction of expenses which were disallowed in the earlier years under section 43B whereas section 43B provides allowance on expenses in the year of payment thereof. This led to litigation between the general insurance companies and the income-tax department.

The Budget Memorandum states that due to the manner in which the provisions of Rule 5 are drafted, there is a possibility that such sum may not be allowed as a deduction in the previous year in which the payment is made. This has not been the intention of the legislature.

Thus an amendment has been made in Rule 5 to clarify the intention of the legislature.

  •  Dividend Distribution tax has been removed and consequently the dividend income is now taxable in the hands of the shareholders and tax is required to be deducted at source on the distribution of dividends. The amendment is applicable from AY 2021-22.

  •  From AY 2021-22, if an individual opts for the revised simplified tax slabs proposed under section 115BAC, no deduction shall be allowed interalia under section 80C and 80D (i.e. no separate deduction shall be allowed for payment of life insurance policy premium, annuity policy premium, medical insurance premium, etc.

The above amendments act as a disincentive from savings / investment and retirement planning of an individual.

Tax Reforms Expected

Expectation from the Budget included:

 1.  Increase in the monetary limit for claiming deduction of health insurance premium paid under section 80D of the Income-tax Act due to rising medical costs. Currently Rs.25,000 to Rs.50,000 is allowed for premium paid for self, spouse and dependent children. If health insurance premium is also paid for parents, then an additional Rs.25,000 to Rs.50,000 can be claimed as a deduction..

 2.  Section 80C of the Income Tax Act offers a tax deduction up to Rs. 1,50,000/- on various investments such as insurance policies, Equity Linked Saving Scheme, Public Provident Fund, National Savings Certificate, National Pension Scheme amongst others. To consider a separate section for deduction for premium paid for insurance policies or increasing the limit under Section 80C would enable customers to look at insurance as a means of fulfilling their long-term financial goals rather than just a tax-saving tool.

 3.  A level-playing field is required for pension plans of life insurance companies vis-a-vis National Pension Scheme and so similar deductions should be allowed.

 4.  Currently the pension received from the pension fund established by insurance companies is taxable in the hands of the annuitant. The expectation is that the amount paid for purchase of the annuity policy should be allowed as a deduction while computing the taxable annuity.

 5.  The insurance industry has a long gestation period and it takes a long time to achieve a break-even. Accordingly, the limit of eight years for carry forward and set-off of business losses is not sufficient and accordingly, insurers should be allowed to carry forward and set-off unabsorbed business losses for a longer than 8 years period.

 6.  A tax deduction of Rs.10,000 should be allowed under Income-tax for insurance of the residential property.

The penetration of both life insurance and general insurance business in India is low as compared to other countries in the region. The government should provide more tax reliefs and adopt measures for growth of the insurance business in India.

Information for the editor for reference purposes only

Bahroze Kamdin, Partner - Deloitte India. Alifya Hakim is Senior Manager and Megha Gala is Manager with Deloitte Haskins and Sells LLP