As Budget 2009 approaches, some thoughts quickly run through my mind. I wish our Finance Minister caters to the following. 

1. Section 80C: Initially, the tax exemptions were defined for different financial instruments in a defined proportion, totaling up to Rs 1 lakh but a few years back, this rule was modified to allow the said instruments in any proportion, upto Rs 1 lakh to be exempt from tax. This rule needs to now be modified again by
a. Increasing the limit from Rs 1 lakh as the amount was set more than 10 years back and has not been adjusted to inflation. This step will encourage consumers to invest more in long term instruments defined by the act.
b. Making a special allowance for insurance products in the same. This is because insurance products have the longest tenure of investment and thus should be encouraged. So, people save more for the long term, especially with the lack of social security in the country. From the economic point of view, this step will also be favourable as insurance directly affects the bond market and infrastructure investments in the country, which is the need of the hour.

2. Tax exemption on annuity: Currently, the annuity or the pension component of retirement planning is taxed on maturity. This is discouraging as the annuity is already affected by years of inflation. So, in the customers old age, not only does inflation eat into his savings, but he also gets taxed on the same. India is a young country today and will have a very high proportion of retired population in the next two decades. Thus the planning for retirement needs to be encouraged now amongst the Indian population, so that a larger population becomes future-ready. Exemption of the annuities will thus encourage retirement-led investments.

3. Service tax: Last year, the government introduced service tax on all charges and maturity of insurance products, which has led to multiple taxation of the same investment. This needs to be corrected by only taxing the fund management charge, thereby ensuring single taxation of the investment.

4. Carry forward of losses: When you compare the insurance business to others, it is one of the longest gestation periods in the financial services category. Currently, companies are allowed to carry forward losses upto 8 years. But as some of the private players have crossed 8 years in operations and still haven't broken-even, the tax burden in the ninth year will make the break-even period tenure much longer. Thus, the government should take cognizance of the longer gestation period of the business and should exempt  the industry from this carry-forward period of losses rule.

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e-mail: Nageswara Rao, IDBI Fortis Life Insurance

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