July 5 2019, was an eventful day for the new Modi Government as the newly appointed Finance Minister, Mrs Nirmala Sitharaman, made her debut and delivered the first Union Budget of the new regime. While the earlier Interim Budget was touted to be a populist one, this budget was largely seen as a roadmap for the growth of the Indian economy in the long run.
The Finance Minister, Mrs Nirmala Sitharaman paved the way for the economic growth of the nation through long-term and sustained efforts in investment. She announced various positive changes in many aspects of the economy, insurance being one of them.
There were three major announcements in the insurance segment which impact the insurance industry considerably. Let’s see what the announcements were and their impact on the industry –
#1 – FDI limit to increase to 100% from 49% for insurance intermediaries
Insurance intermediaries are insurance middlemen that help in selling insurance policies by bringing the customer and the insurance company on the same platform. To promote insurance selling and to increase the number of intermediaries in the insurance segment, the Finance Minister proposed a hike in the FDI limit of intermediaries. From the current 49%, the limit has been proposed to rise to 100%.
- Higher limit on investments by foreign companies would allow foreign intermediaries to set up their business in India and increase the number of insurance intermediaries
- As the number of intermediaries would grow, the penetration of insurance would increase. This would also cause insurance products to reach even the remotest parts of the country
- Existing intermediaries can benefit from an increase in capital infusion by enhancing their technology and developing their distribution channel
#2 – Requirements of Net Owned Funds to reduce for reinsurance companies
Another landmark proposal presented by the Finance Minister was the reduction in the requirement of Net Owned Funds for reinsurance companies. Previously, reinsurance companies were required to maintain a fund of INR 5000 crores which has been proposed to be reduced to INR 1000 crores.
- The reinsurance segment would become more feasible for new entrants as the capital requirements have reduced
- New companies would be expected to start reinsurance business which would create better premium options for insurance companies seeking reinsurance
- Insurers who are expert in particular fields of insurance can set up their reinsurance business to capitalise on their expertise and grow their business at the same time
#3 – Change in the method of TDS calculation on insurance proceeds
Life insurance maturity proceeds are completely tax-free under Section 10(10D) of the Income Tax Act if the premiums paid are not more than 10% of the sum assured. For policies issued on or before 1st April 2012, if the premiums are up to 20% of the sum assured, the maturity proceeds are completely tax-free in the hands of the policyholder.
However, if the premiums are higher than the specified limits, TDS is deducted from the maturity proceeds @1%. This method of TDS calculation has been changed. Instead of a 1% TDS on gross maturity proceeds, the Government has proposed a TDS of 5% on the net income of the policy, i.e. the net proceeds from a life insurance policy after deducting the premiums paid.
- As TDS would be calculated only on the net income of the taxpayer, the income as per TDS would become similar to the net income filed by the taxpayer in the income tax returns
- This would make income calculations simpler and remove any ambiguity in calculation of the taxable income
- The tax department would also find it easier to calculate the tax liability on the net income of the taxpayer
All these changes are positive changes with respect to the insurance industry, its intermediaries and even the customers. With these changes proposed in the Union Budget 2019, the insurance industry is expected to grow contributing to the overall growth of the Indian economy in the process.