Tax incentives cannot drive the sale of pension plans when the informal sector is not paying taxes, pointed out life insurance companies in a recent meeting with the Insurance Regulatory and Development Authority.
In the first half of the fiscal 2003, pension plans sold amount to Rs 67 crore (Rs 670 million), which accounts for approximately 10,000 policies.
However, as per the National Readers Survey, 3.9 crore (39 million) males in the age group of 32 to 55 need to plan for retirement.
"The Indian system is not developed for a member of the informal sector to invest in a pension plan," said OM Kotak appointed actuary Andrew Cartwright. Rickshaw drivers, traders, shopkeepers and other self-employed Indians including doctors do not pay taxes, and if they do pay taxes, it is not in keeping with their actual income.
The government needs to provide incentives for savings made for retirement not necessarily through tax exemptions. Else it should make these investments compulsory, said Cartwright. It could introduce a contribution system whereby for every rupee saved, the government could put in a sum towards the retirement benefit.
In countries like South Africa, 15 per cent of one's income is tax-free if invested into a retirement provision, said Cartwright. This has become a big incentive there, especially since about 10 per cent of the population has AIDs.
Life insurance companies have also been pushing for increasing the tax exemption under section 80 CCC of the Income Tax Act to push pension products.
However, as only a small portion of the working community falls under the tax net, even if the tax exemption is doubled or tripled, it will not entice the general informal public to save for post-retirement.
Currently, one gets the benefit of tax exemption on Rs 10,000 per annum under section 80 CCC. However, this is a small sum to put aside for one's retirement planning, said ICICI Prudential Life CEO Shikha Sharma.
The Life Insurance Corporation of India Chairman S B Mathur said in building one's retirement fund, one faces double taxation.
As the tax rebate is only up to Rs 10,000 towards building up a pension plan, "much of the premium income comes from post-tax returns," said Mathur.
On the other hand, when a policyholder buys an annuity product from the corpus accumulated, his monthly pension is taxed as it amounts as income. This double taxation is a disincentive to encourage retirement savings.