Pension: More tax benefits likely

With the budget upon us, there are renewed expectations for more tax sops. Will the finance minister oblige? Probably he will. We present an analysis of what Budget 2005 could have in store for insurance seekers.

What should happen?

In the immediate scenario, several tax reform measures being debated could help the insurance buyer.

For example, the Kelkar Committee is advocating continuation of deduction under Section 80CCC for contribution to a pension fund of an insurance company in India and increase the tax exemption for pension plans from Rs 10,000 to Rs 20,000.

Says Shikha Sharma, CEO & MD, ICICI Prudential Life Insurance, "To initiate this in India, the taxation system should encourage savings to generate a post retirement income of at least Rs 8,000 per month, adjusted for inflation (which will still keep him below the current minimum taxable income). Considering the proposed reform and the above example there exists a strong reason to enhance the limit under Section 80CCC(1) from Rs 10,000 to Rs 35,000. Hopefully, the present government will recognise this need and increase the limits."

While conventionally Indians have bought insurance mostly from a tax-saving perspective, this trend should change. However, this level of maturity is unlikely to develop overnight. Until then tax benefits may need to be persisted with.

For instance, pension is important regardless of tax benefits, but if tax benefits are withdrawn it could adversely impact the sale of pension products covered under Section 80CCC. There seems merit in continuing with tax benefits under Section 88 as well.

What is likely to happen

Hopefully, the budget will see tax exemption on pension plans go up to Rs 20,000 from the present Rs 10,000, as recommended by the Kelkar committee.

As Sharma points out, "The world over, pensions have been driven by tax exemptions, and hopefully the government this year will also present a budget that encourages long-term, retirement savings amongst the masses so that each person can build their own retirement kitty."

The deduction under Section 80CCC will be given a tax rebate of 20% as against a similar deduction from taxable income. If the committee's proposal for removal of Section 88 would be taken into consideration then this move would hit the salaried class hard.