The Union Budget proposal on tax breaks for savings has increased the potential market size for life insurance companies, which are gearing up to aggressively promote their products.
The tax break in the Budget proposal is open to people regardless of their income to an extent of Rs 1 lakh (Rs million), unlike the existing tax rules (Section 88).
Moreover, all insurance products -- excepting pension -- are tax free upon redemption under section 10(10)D. This section has not been removed in the Budget, which is a big plus for insurance plans.
Life insurance companies' unit linked plans which cover the entire spectrum of investment options are expected to appeal to a wider range of people. Almost all the products sold by Birla Sun Life Insurance are unit linked.
Nani Javeri, CEO, Birla Sun Life, said that the company will take the new tax proposal as an opportunity for selling long-term savings such as pension policies and endowment products, and aggressively compete at acquiring the consumers investment of Rs 1 lakh (Rs million).
So far, life insurance companies were using the rebate under the Section 88 as a tax concession tool to sell life insurance policies.
One product offered by mutual funds, equity linked savings scheme (ELSS), would also qualify for the tax break. However, there appears to some confusion about the tax status of the more popular mutual fund products such as diversified equity schemes.
T P Raman, managing director, Sundaram Asset Management, said that on the face of it, only ELSS seems to qualify for a tax break. However, the company is awaiting more details, he added. With at least one mutual fund scheme in the fray, competition lies ahead.
Sam Ghosh, managing director, Bajaj Allianz Life Insurance Co Ltd, said this will enable a consumer to choose his savings options for tax concessions from mutual funds, insurance among others. This means that insurance companies will have to become more aggressive in selling their products, he added.
Another industry hand does not believe the budget proposal has brought about any significant change. He said that the proposed tax structure has actually not created many options for the consumer, but just raised the eligibility of existing investments.
Another change in the offing is the elimination of limits on investment in different instruments. Now, investors can get tax concessions on any specified instrument for the entire Rs 1 lakh (Rs million).
The advantage of unit linked products over ELSS is that consumer gets fare more variety in terms of investment avenues. Awareness of unit linked products, the biggest selling product this fiscal for the industry, is high.
The finance minister, P Chidambaram, in his Budget recommendations had eliminated the tax rebate under Section 88 and omitted the Section 80L.