Section 80C: Hoping For More

There isn’t much in the offering for taxpayers when it comes to Section 80C benefits. For long, the limit has remained fixed at Rs 1.5 lakh, though average income has grown manifold

The penny has dropped. There seems to be no specific scope for insurance in the grand scheme of things related to tax savings, as legislated by the authorities, apart from what is being already offered.

This cold-shouldering is in stark contrast to the expectations that have built up in various pockets of the insurance sector. The latter, now greatly focused on the retailisation in the mass market, had strongly urged the government to broaden the scope of tax sops as fresh incentives for higher sales.

What might seem odd in this context is the near-absence of any particular incentive for the average taxpayer, troubled though he is with only a handful of options. Many of these stem from the fabled Section 80C of the Income-tax Act, 1961. For the record, the scope of such options has remained range-bound for long, resulting in a demand for its expansion.

Those who believe in insurance, not to mention mutual funds, as a savings option, are especially constricted in the process. These are absolutely ordinary Indians who are now willing to leverage their investments for growth, income-generation and tax savings—not necessarily in that order.

Here we are primarily concerned with the average tax saver in this context. He is fully aware of the limited space he is currently operating from. But in reality, that space has not grown in size and stature for years. To cut a long story short, admissible savings under the relevant section (Section 80C) has stayed restricted to Rs 1.50 lakh for a long time. Meanwhile, average income has grown, lending credence to the belief that ordinary Indians now not only need a higher savings limit, but also a larger basket of tax-efficient instruments.

Insurance, it is by and large understood, can meet that demand perfectly. Witness the growing numbers recorded by the insurance sector. An increase in the number of players and the range of products, and most evidently, a raft of higher sales figures. Add to that the burgeoning trend: retailisation.

In other words, insurance is now more deep-set in the Indian market. While we are still far, far away from the universalisation of insurance (a coveted goal flagged by policymakers), the sector has attracted hordes of new customers. Indeed, “the bottom of the pyramid” for insurers looks a lot larger than ever before. New layers are being added to the structure every season, especially so by the contributors in Tier-II and Tier-III centres. An expansion in the remit of Section 80C would help these layers, as well as older customers, to save more through the growing medium of insurance.

Look Beyond...

If we permit ourselves to look beyond immediate sales scorecards, we will come across another interesting trend, albeit located in another segment of the market. I am particularly referring to tax-saving mutual funds, officially called equity-linked savings schemes (ELSS), which too allow investors to save under the relevant section. While fund managers have lately grown exponentially—their combined assets now top Rs 50 lakh crore—the ELSS pack per se has not kept pace with the changes. This, it is often lamented in professional investment circles, is rather unfortunate.

The sense of dejection gets heightened because these funds come ready with many advantages. The foremost among such advantages is the potential to generate alpha. Moreover, their lock-in period is a mere three years. This, I must especially mention, is the shortest lock-in period in the entire sphere of tax-saving instruments. A quick look at the performance numbers delivered by the ELSS pack will also bring the issue to the fore. By and large, actively managed funds have posted superb returns in the last few years. And the ELSS category is no different. The situation is actually a wake-up call for policy mavens. The need of the hour is a pragmatic measure.

I will urge them to adopt a “Look Beyond” strategy that will also increase the number of available options for the common man.

Such options, in fact, should bring everyday savers closer to the market. I am alluding to all actively-managed, bespoke-performance investment avenues. Unit-linked insurance plans (Ulips) can be cited as an example. Clearly, it is time to give Ulips a longer rope; an additional impetus will truly give them the fillip they deserve.

...And Look Within

At the other end of the spectrum lies what I will term a “Look Within” argument. It is essentially a proposal on an internal overhaul of insurance norms that allow tax savings. The rationale is simple: involve fuller disclosure and ensure adequate information dissemination.

Our savers deserve these at the very least. I must, of course, admit that it is not difficult for discerning investors to locate critical data these days. For example, information on portfolios of insurance plans is easy to find. Other data, such as those related to charges and expenses, are also available to those who seek such minutiae. On a slightly flippant note, may I remind readers of the popular notion that the devil lies in details!

Well, the disclosure of all critical details have been mandated by the insurance regulator already. Indeed, the Insurance Regulatory and Development Authority of India deserves a special word in this context. The insurance sector has benefited from regulatory willingness and efforts, driven by the reformist agenda of the government.

It stands to reason that an average individual keen to save tax is fully conversant with the insurance plan chosen. While tax is no doubt a weighty matter, other details need to be understood as well. As I have mentioned earlier, expenses are a vital issue. Added together, they have a great impact on performance.

Among tax-saving instruments, Ulips, which aim to provide returns along with indemnity, are our particular concern in this context. The fact that they seek to deliver market-determined results places them on a unique pedestal but looking within is essential. The costs should justify your need for saving tax, otherwise you may look at options other than insurance.  

Fixed-return options, such as National Savings Certificate, or even category-specific alternatives like Senior Citizens Savings Scheme are popular with certain sections of the market. However, with merely moderate administered rates, these have no place in the contemporary world marked by a constant and entirely justified demand for smart returns.

By Nilanjan Dey, Director, Wishlist Capital