SUCCESSIVE governments have been competing with each other in extending tax relief to the middle class through the Budget. Section 80C of the I-T Act is where most of the action takes place.
Every year, in the months preceding the Budget day, there are write-ups on this section, offering advice on how to maximise tax savings. This often drives people to borrow to meet the permissible limit of investments. Unfortunately, the tweaking of the slabs and rates under Section 80C every year, amid applause from the treasury bench, does not offer the middle class any real benefit. The changes generally do not offer higher purchasing power to the middle class, but only neutralise the erosion in purchasing power due to inflation.
I often wonder whether Section 80C really deserves the hype it gets in the Budget? The economics of keeping the middle class always at the middle needs to be understood better and the myths about encouraging savings through insurance need to be discarded.
The middle class not only has to worry about maintaining a decent living for the family, but also to save and earn enough over a period of time.
In fact, Section 80C is directed towards promoting long-term savings by this class so that there is availability of long-term funds for investment by the government in the infrastructure sector.
Contributions up to R1.5 lakh to the EPF, PPF and the five-year bank deposits, along with repayment of principal amount on housing loan, payment of school fees and amount paid to keep a life insurance policy in force, qualify for deduction from taxable income. If we estimate the real value of such savings at both ends of the spectrum of the middle class,with income ranging from R3 lakh to R10 lakh, the saving of R1.5 lakh is neither an easy option nor an attractive proposition. Savings can’t be at the cost of day-to-day needs.
As a professional insurer, therefore, I am inclined to believe that Section 80C has, over a period of time, shifted from being an incentive to buy risk cover to one to save tax. What’s missing is the urgency to provide an umbrella of financial security in case of unforeseen events robbing individuals of their right to a decent living.
The unholy marriage of Section 80C and life insurance must end now. Even the most educated consider life insurance only as a tax-saving channel, fully ignoring its value as a financial tool for protection. Though it is difficult to break away from the conventional mindset, I believe insurance should be taken out of the ambit of Section 80C.
Social security is essentially the responsibility of the state. The government must view insurance as a self-financed tool in the hands of individuals for mitigating monetary effects of early death of the bread earner or of living longer, loss of life or property, even sources of income due to fire, accident or natural disaster.
Since the government can’t step in to give relief to each suffering citizen in all such adversities, the best alternative could be encouragement from the state to go for life as well as other kind of insurance on a much larger scale. Let everyone buy a few policies wherein a certain amount of premium could be shared by the state through direct benefit transfer on the same lines as cooking gas. The benefit can be limited to pure risk life policies, annuity and also to householder’s policies, including personal accident and limited benefit health covers.
This paradigm shift may lead to deeper market penetration for both life and non-life business. Enhancing the share of insurance in GDP is possible only if insurance is treated as insurance and all stakeholders do a rethink on the business.
The writer is advisor, GIC Re and former MD & CEO, Star Union Dai-ichi Life
