The Budget is a financial blueprint that lays out the government's plans for revenue and spending for the upcoming year. This year's pre-Budget discussions have been particularly important as the world is still reeling from the economic impact of the COVID-19 pandemic. The government is expected to take into consideration the present global economic landscape while formulating the Budget.
Pure life insurance, also known as term insurance, is one of the critical safeguards one should have in the realm of life insurance. This type of policy offers coverage for a specified duration, typically 20 or 30 years, and provides a benefit to the designated beneficiaries in the event of the policyholder's demise during the term. One of the steps taken by the government to encourage people to take life insurance policies was to provide a deduction for the premium paid for such policies.
Presently, the premium paid by the policyholder for a pure life insurance policy is offered as deduction from the income subject to a maximum limit of INR 1.50 lakh under Section 80C of the Income Tax Act, 1961 (Act). However, Section 80C is a very comprehensive provision which allows individuals to claim a deduction for variety of specified investments and expenses including contributions to Employee Provident Fund (EPF), Public Provident Fund (PPF), tuition fees for children, principal repayment on home loan, equity-linked savings scheme (ELSS), etc. and the deduction towards all of these is within the overall ceiling of INR 1.50 lakh.
Thus, the taxpayers have advocated for the creation of a standalone tax deduction specifically for premium paid towards pure life insurance. This expectation is based on the following rationale:
A. Encouraging more individuals to invest in term life insurance:
The introduction of a separate tax deduction specifically for term life insurance could make this type of coverage more appealing to individuals who may not have considered it otherwise. Often, individuals tend to overlook term life insurance as an option for protecting their loved ones, due to the perception that it is a costly and complex type of coverage. However, by offering a separate tax deduction for term life insurance, the government would be effectively communicating to the public that this type of coverage is not only important, but also financially viable. This could serve as a powerful incentive for individuals to invest in term life insurance, as it would be more affordable and easier to understand. Additionally, a separate tax deduction for term life insurance could serve to demystify the misconceptions surrounding this type of coverage, making it more accessible to a wider range of individuals.
B. Recognizing the importance of death benefit protection:
A separate tax deduction for term life insurance could acknowledge the importance of this type of coverage in providing benefit to loved ones, and support individuals in their efforts to safeguard their families' financial well-being.
C. Simplifying the tax calculation process:
By offering a separate tax deduction for term life insurance, it could simplify the tax calculation process for individuals as they would not have to consider other types of savings or investments while claiming the deductions. The ceiling limits under section 80C and 80CCE makes it complex for the taxpayers to understand the amount of net benefit being derived from the deductions.
D. Encouraging financial planning:
By providing a separate tax deduction for term life insurance, it could encourage individuals to plan their finances in a more comprehensive manner. It would require individuals to take a more holistic view of their financial needs and would prompt them to consider other types of savings and investments in addition to term life insurance. This would lead to better financial planning and decision making, which would be beneficial for the individuals as well as for society as a whole. By providing a separate tax deduction for term life insurance, the government could encourage individuals to think long-term about their financial security and make decisions accordingly.
E. Reducing the tax burden on individuals:
The separation of a tax deduction for term life insurance would go towards reducing the overall tax liability of the individual, leaving more cash in hand. By providing a separate tax deduction for term life insurance, the government would be providing financial relief to individuals, enabling them to save more money for their families' future needs. Additionally, it would also be beneficial for society as a whole, as more individuals would be able to secure their families' future needs.
In conclusion, the introduction of a separate tax deduction specifically for term life insurance could bring about a host of benefits to individuals and society as a whole. From encouraging more individuals to invest in term life insurance to simplifying the tax calculation process, the benefits of such a move are numerous. It would serve to acknowledge and support the significance of this type of coverage, in turn safeguarding the financial well-being of families. Additionally, it would also foster a culture of financial planning and help to reduce the overall tax burden on individuals.
Akhil Chandna, Partner, Rajashree Sarna, Director and Pooja Lara, Manager – Grant Thornton Bharat