The Union Budget for 2005-06 is likely to double the tax benefit available under Section 80 CCC(i) to Rs 20,000 for investments made under pension plans.
This is in line with the Kelkar committee recommendations. It is also expected that the government will create a sub-limit under Section 88 for pension products.
Currently section 80 CCC(i) allows deduction from gross income for investments in any pension product up to a ceiling of Rs 10,000.
Insurance companies have been urging the government to allow a tax deduction ceiling of at least Rs 40,000 for the past four years since the industry was privatised.
The Insurance Regulatory and Development Authority had proposed a hike in the exemption on pension savings to Rs 40,000, and had submitted its draft report on this.
Individuals tend to invest only Rs 10,000 in pension plans even though this will hardly yield much of a monthly pension on retirement.
"If the benefit rises at least three-to-four-fold, this would provide a higher monthly pension to individuals on retirement," said the chief financial officer of a north India-based insurance company.
Should an individual of 20-25 years start saving for his retirement, he would get a monthly pension sum of Rs 12,000 on retirement.
However, most individuals tend to start thinking of retirement only after turning 40. At current annuity rates, a 45-year old individual who starts saving for his retirement, would get just a monthly sum of Rs 1,500 by putting away Rs 10,000 every year. He should be saving at least Rs 75,000 per annum in order to retire on a monthly figure of Rs 12,000.
Meanwhile, insurance companies are dreading the budget as each of the earlier budgets have had their share of surprises the introduction of service tax on risk premium and removal of tax benefit on single premium policies, among others.
There are talks that the centre will hike the service tax once again from the prevailing 10 per cent to 12 per cent. This too is part of the Kelkar Committee report, which states that service tax has to move towards 16 per cent by 2008.
"Any further increase in the service tax will be a dampner on the life insurance sector, which will for the first time pass on the service tax to the customer," said the CEO of a leading private insurance company.
The industry has been pushing for tax reforms as per the recommendations of the VU Eradi Committee four years back.
The committee was asked to look into issues pertaining to the taxation of life insurance companies. At present, the Life Insurance Corporation of India is taxed at 12.5 per cent on its valuation surplus.
As new companies would not be making any surplus for at least five to seven years, the government had to take this into account before taxing them, the report said.