Mrs. Nirmala Sitharaman presented her second budget in eight months after the Modi 2.0 Government was formed last year. This Union Budget 2020 emphasized on various social welfare schemes. It has also proposed major changes in the personal finance segment which would give immense tax reliefs to taxpayers. Let’s have a look at some of the major announcements in this year’s budget which impact insurance and personal finance –
In the insurance sector
A major proposal has been made by the Finance Minister with respect to LIC, the leading and the oldest life insurance company in India. Mrs. Sitharaman has proposed an IPO (Initial Public Offering) in LIC where the Government can raise funds for the company from the public. As a result, a part of Government’s holding in LIC would be disinvested. This would open LIC’s door to private investors and boost capital inflow in the company.
In the personal finance domain
The major change in the personal finance domain was the introduction of a simplified tax regime where the tax slab rates have been changed. The new slab rates, as proposed by Mrs. Sitharaman, are as follows –
|
Level of income |
Proposed tax rate |
|
Up to INR 500,000 |
Nil |
|
INR 500,001 to INR 750,000 |
10% |
|
INR 750,001 to INR 10,00,000 |
15% |
|
INR 10,00,001 to INR 12,50,000 |
20% |
|
INR 12,50,001 to INR 15,00,000 |
25% |
|
INR 15,00,001 and above |
30% |
As against the new slab rates, the existing tax slab is as follows –
|
Level of income |
Proposed tax rate |
|
Up to INR 250,000 |
Nil |
|
INR 250,001 to INR 500,000 |
5% (full rebate on the tax liability for incomes up to INR 5 lakhs) |
|
INR 500,001 to INR 10,00,000 |
20% |
|
INR 10,00,001 and above |
30% |
The new tax regime would be optional for tax-payers and if the new regime is chosen, deductions under Chapter VI A of the Income Tax Act, 1961 (Section 80C, 80D, 80TTA, etc.) and other allowed exemptions would not be allowed.
Since the new tax regime is optional, your taxpaying clients can calculate their tax liabilities under the new and existing tax slabs and then choose whichever gives them the maximum tax benefits. The old tax system can be used for calculating the tax liability where the deductions would be available while the new regime would not allow deductions. By allowing taxpayers a choice, the Finance Minister has given tremendous relief to taxpayers allowing them to save their tax liability by the maximum possible amount.
Other changes in the personal finance domain include the following –
- Deposits done with banks would now come with an increased insurance cover. Currently, an insurance cover of INR 1 lakh is allowed on bank deposits which have been proposed to increase to INR 5 lakhs. This would provide increased security to depositors promising them higher insurance on their deposits if the bank becomes bankrupt or faces liquidity.
- The tax benefit on affordable housing scheme has been extended by one year. A new income tax deduction section, Section 80EEA, was introduced in the last budget. This section allowed an additional deduction on home loan interest payments besides Section 24. Individuals who availed loans for homes valued up to INR 45 lakhs could avail an additional deduction on the interest paid on such loans. The limit of deduction was up to INR 1.5 lakhs and the deduction was allowed for loans availed up to 31st March 2020. However, in the latest budget, the date of availing the loan has been extended to 31st March 2021 thereby giving potential homeowners tax benefits on affordable housing schemes.
- The Dividend Distribution Tax (DDT) has been proposed to be eliminated in the new Union Budget 2020. Currently, companies deduct DDT on the dividends that they distribute among investors. The rate of DDT is 15% and surcharge and cess is charged on it bringing the effective rate to 20.35%. Since dividend is distributed post DDT, dividend income is tax-free in the hands of investors. However, as per the new changes, DDT would not be deducted by companies. The dividend income, in turn, would be taxed in the hands of investors themselves at their income tax slab rates.
- NRIs have also been allowed to invest in specified Government securities. This is a new move by the Finance Minister as it was not the norm earlier. This would help boost investments by NRIs and bring about a growth in the economy
- As many as 70 out of 100 exemptions and deductions have been removed. Though the list of removed exemptions has not been stated, the Finance Minister expects to cut down on more exemptions in the coming years to make the tax regime simpler and unambiguous.
Impact of the Union Budget 2020 on insurance
The budget looks to provide taxpayers with some major tax benefits thereby resulting in a higher disposable income in their hands. As they can save more, they can afford higher insurance covers to adequately cover themselves against financial mishaps.
Moreover, the emphasis on digitization and to provide internet connection even in the remotest corners of India would result in a higher insurance penetration. People for all strata of society would be able to buy insurance online when digitization is stressed upon. This would create a boost in revenue of insurance companies.
With LIC’s IPO, the company would be able to raise substantial capital to offer better products at cheaper premium rates making its policies more popular.
With a tax boost given to MSMEs and start-ups, the Government has aimed to allow the companies to retain a higher amount of profit for development. As the profit margins of such establishments increase, they would be in a better position to invest in insurance policies for the business risks that they face.
Thus, with the measures being proposed in the Union Budget 2020, the insurance sector looks poised to grow and contribute towards the growth in the economy. Moreover, with the changes proposed in personal finance, a boost to the economy looks possible which is the need of the hour.
