EET regime would impact life insurance

Venkatachari Jagannathan
22 October 2005

Chennai: The domestic life insurance industry has begun to dread the union budget. In recent times, budget proposals and their subsequent enactments have actually gone against the insurance sector.

The forthcoming budget for the financial year 2006-07 is not expected to be any different, the industry feels. The reason for their fear lies in the provision of the Exempt-Exempt-Tax (EET) Committee under the chairmanship of Dr R Kannan.

In his 2005-06 budget speech finance minister P Chidambaram said, "Tax treatment of savings is a complex issue but we can benefit from the best international practices in this regard. We have already introduced EET-based taxation in the defined contribution pension scheme applicable to newly recruited government servants. Before we fully migrate to the EET system for all kinds of savings, it is necessary to resolve a number of administrative issues. Hence, without making any change for the present, I propose to set up a committee of experts that will work out the road map for moving towards an EET system."

The EET regime would result in exempting the contributions made to tax savings instruments and schemes in a way that would exempt the accumulations, but tax the withdrawals. Currently, many of the savings instruments are in the exempt-exempt-exempt (EEE) category.

In a presentation to the EET committee, the Life Insurance Council (the self regulating body of life insurers) has said that the EET regime would affect the sale of life insurance policies – a long term savings instruments – in a country with already a very low life insurance penetration.

According to the Life Insurance Council, given the absence of a social security net as in the West, long term savings through life insurance and pensions should be encouraged individually and not clubbed with other savings instruments that have a maturity of less than five years.