Finance Minister Nirmala Sitharaman has proposed in the 2024 Budget unveiled yesterday that a reduction in the TDS (Tax Deducted at Source) rate to 2% from 5% on payouts from life insurance policies.
The tax cut, which will take effect from 1 October 2024, will mean a higher sum payable to the insured or beneficiary.
The Finance Minister also proposed a reduction in the TDS on the payment of insurance commission or any income by way of remuneration or reward (in case of a person other than a company) for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance) to 2% from 5%. This cut will take effect on 1 April 2025.
Mis-selling of insurance
In its Economic Survey report released on 22 July ahead of the Budget delivery, the Ministry of Finance highlighted the critical need for deeper insurance inclusion to safeguard the financial well-being of the population.
According to the Economic Survey, "Product mis-selling is too rampant to be dismissed as an aberration of a few overenthusiastic sales personnel. The same can be said of the insurance industry as well. Prompt and reasonable settlement of insurance claims and a lower rejection rate are necessary to increase insurance penetration. Acknowledgement of mis-selling and misrepresentation and compensating for consequential losses is a good business practice enjoined upon stockbroking, fund management, banking, and insurance firms."
The Survey called for targeted policies to increase insurance penetration, particularly in underserved rural areas, and encouraged collaboration between the government and private sector to innovate and promote inclusive insurance solutions.
Pension
On the pension side, Ms Sitharaman announced in her Budget address a plan to increase the family pension deduction amount for 40m salaried individuals and pensioners. The deduction amount is proposed to be increased to INR25,000 ($299) from INR15,000. The standard deduction for salaried employees is proposed to be increased from INR50,000 to INR75,000.
Ms Sitharaman also proposed raising the amount of deduction which is allowed to an employer for contributions made to the National Pension System (NPS) and the Atal Pension Yojana (APY) —a pension scheme for those in the informal labour segment. The deduction is to be raised to 14% of the salary of an employee from the current 10%.
Similarly, a deduction of up to 14% of the income of employees in the private sector, public sector banks and undertakings, opting for the new tax regime, is proposed. This will be in place of the current 10%.
NPS for children
Furthermore, the NPS-Vatsalya, a plan for contribution by parents and guardians for minors, will be started. On the minors attaining the age of majority, the plan can be converted seamlessly into a normal NPS account.
Preventing misuse of deductions of expenses claimed by life insurance business
The Budget text also stated it has been noticed that there have been instances where non-business expenses have been claimed by life insurance companies and there is no provision to add back these to the income of such companies.
To ensure that provisions are not misused to claim deduction for expenses that are otherwise not admissible, it is proposed that the law be amended so that such expenditure would be included in (i.e. added back to) the profits and gains of the life insurance business. This change will take effect from 1 April 2025 and will apply from the assessment year 2025-2026 onwards.