Financial Daily from THE HINDU group of publications
Tuesday, Jul 06, 2004
Industry & Economy
Money & Banking - Pension Plans
Raise exemption limit to Rs 40,000 says IRDA I-T sops for pension investments urged
Hyderabad , July 5
WITH the Union Budget just two days away, the Insurance Regulatory and Development Authority (IRDA) has suggested more income tax benefits for investments in pension funds and also liberal investment norms under the new pension system.
"What is needed today is an income tax structure which would be stable and promote the development of pension funds. Investments will be of a long-term nature, and investors would also expect long-term stability on income tax policies on such investments," said the IRDA Member (Life), Mr T.K. Banerjee.
One of the reasons why pension funds did not develop earlier in this country was that the investors perceived that there was a sort of double taxation of such investments.
When the amount is invested, income tax relief that is available to the individual is at best partial whereas when the pension is payable the whole amount is treated as taxable income, including the capital. Of course, there is a provision in the present income tax rules that allows commutation of one-third of the pension and such commutation on normal retirement is free from income tax. But in today's interest rate scenario, one-third of the accumulation does not represent the capital invested by the person, Mr Banerjee said in a note to the insurance industry participants.
Echoing similar views, the IRDA Chairman, Mr C.S. Rao, said the lower tax benefits for pension investments relative to that for other kinds of investment such as housing property, life insurance policies and mutual funds was one important reason for the relative neglect of annuities in the country.
Mr Banerjee justified the present thinking of exempting both contribution and accumulation stages and only taxation at payout stage.
"The limit of exemption, which is at present Rs 10,000 level, should be raised to Rs 40,000 to encourage sufficient contribution for a reasonable pension. In that event, exempting commutation value from I-T will not be necessary," he said.
Citing the examples of countries that carried out pension sector reforms successfully, Mr Banerjee said those countries laid a great emphasis on an aggressive investment policy by pension fund managers. Chile, the first country in South America that went ahead with such reforms successfully, did allow at least 85 per cent of the investment in equities and a sizeable portion of that in the foreign market.
"All along in our country we have emphasised on a conservative investment policy for insurance and pension funds. If we continue to follow a similar policy, the chances of a decent return to the pensioners will be remote," Mr Banerjee said, while stressing on the need to consider more liberal investment norms under the new pension system.
Viewing that the equities market was not mature enough and lacked adequate depth, the IRDA member suggested measures to address such specific inadequacies for successful implementation of reforms in the pension sector.
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