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Hema Ramakrishnan
Sarbajeet K. Sen

NEW DELHI, March 29

IN a move that would facilitate future reforms in the pension market, the Government has permitted private insurance companies to provide annuities to beneficiaries of approved superannuation funds run by corporates. Corporates which run such `approved' funds will also qualify for income-tax exemptions.

The decision to open up the annuities market for the approved funds marks an end to the monopoly hitherto enjoyed by the Life Insurance Corporation of India (LIC), thereby providing a level playing field for private insurers.

Annuities are monthly payouts made by the annuity providers (the insurance companies) to the beneficiary of a superannuation fund against the pension assets accumulated in the person's account during the working life. The payout is made on retirement, termination of service or death of the beneficiary.

Apart from throwing open the annuity market, the Central Board of Direct Taxes (CBDT) has also amended the relevant Income-Tax Rules 1962 to allow private players in the insurance sector to run group gratuity schemes where companies having approved gratuity funds can make contributions.

Till now, the contributions received in a Gratuity Fund set up by a company could be deposited in the group gratuity scheme run by LIC or in a post office savings bank account or in an account in any scheduled commercial bank.

Currently, tax exemption is available to a trustee of a superannuation fund or a gratuity fund on income received only if the funds are granted the `approved' status by the Chief Commissioner or Commissioner of Income-Tax. Thus, running an unapproved superannuation fund without the tax benefits would not be attractive for the employer.

The employer's annual contribution to the superannuation and the gratuity funds are allowed as deductible business expenditure in computing the taxable income. For this purpose, the total contribution of the employer and the employee under the superannuation scheme should not exceed 27 per cent of the employee's salary.

While the employers' contribution to a superannuation fund is not treated as perquisites in the hands of the employee, the employee's contribution attracts a tax rebate of 10 per cent of the contribution subject to the overall maximum limit of 12,000 per annum.

For gratuity funds, the gratuity received by an employee under the Gratuity Act is exempt up to the lower of the actual amount received as gratuity or Rs 3,50,000 or 15 days salary for every completed year of service or part thereof in excess of six months.

According to industry observers, the entry of private insurers in the annuities market could be the first step towards their larger involvement in providing old-age security once the pension reforms are kicked off by the Government in the near term.

The need to co-opt private insurance companies as annuity providers had been suggested both by the S.A. Dave Committee in its Old Age Social and Income Security (OASIS) report and the more recent pension reforms report of the Insurance Regulatory and Development Authority (IRDA). The two reports together would provide the Government with the inputs for the framework for a new pensions system in India.

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