An annuity is a contract issued by an insurer to make regular payments to a policy-holder for the rest of his life after retirement. The frequency of payment depends on the way the policy is structured. Going by the existing income tax law, an individual can claim a tax deduction of up to Rs 1 lakh on the premium (or the principal contribution) paid for the annuity plan. But the payments received by the individual -- annuitant in technical parlance -- are fully-taxed.
The tax rate depends on the slab in which the tax-payer falls, with the maximum marginal rate at 30%.
The insurance regulator has asked the finance ministry to consider bi-furcating the principal and the interest component in payments made to annuitants. "We have asked the government to consider making the principal-component tax-free," J Hari Narayan, chairman, Insurance Regulatory Development Authority told ET. The rationale for a tax exemption on the principal component is the amount has already been taxed. In fact, many countries do not levy a tax on the original contribution in an annuity plan. Revenue officials, however, contend that the payment received by the annuitant is treated as his income and hence fully taxed.
Source: Economic Times Tax burden may ease on annuity plans
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By ugesh sarkar, Section News
Posted on Fri Jun 05, 2009 at 01:25:36 AM EST
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The regulator's proposal will enhance returns for the investor, said the chief financial officer of a private insurance company. An employee, for instance, is taxed only partially on the money he receives from an approved superannuation fund, according to Divya Baweja, Partner BMR & Associates. The insurance regulator has also sought more avenues for investments in long dated government securities to help insurers in their asset-liability management, said Hari Narayan.
IRDA's budget-wish list also includes easing the service tax burden on Unit Linked Insurance Plans that offer protection in terms of life cover and flexibility in investments to the policy holder. Currently, insurers have to pay service tax on the charges they collect for managing ULIP investments. Mutual funds, on the other hand, pay service tax only on the asset management charge. The regulator wants a similar dispensation in Ulips. The global economic melt-down has impacted investments in ULIPs which contribute to around 70% of the new business for insurers.
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