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Life Insurance Corporation - LIC

K.J Somaiya College Of Science And Commerce Page 1

INTRODUCTION TO INSURANCE AND ITS FUNDAMENTAL PRINCIPLES

In 1575, during the reign of Queen Elizabeth I, the Chamber of Assurance in the Royal

Exchange was opened for the registration of marine parcels. Following this, an Act of

Parliament was passed in 1601 to deal with disputes relating to marine insurance. The

British introduced marine insurance, in its modern form, in India around 1700. The first

company, known as the Sun Insurance Office, was set up in Calculate in 1710.

The origin of fire insurance, which covers stationery property, in its modern form, can be

traced to the Great Fire of London, which in 1666 destroyed more than13, 200 houses. In

the aftermath of this disaster a certain Nicholas Barbon opened an office to insure buildings.

In 1680 he established Englands first fire (general) insurance company, The Fire Office, to

insure brick and frame homes.

It was in the 18th century that Societies began to be formed in the UK for issuing life

policies. Among such Societies, the Amicable Society (1705), the Equitable Assurance first

life insurance company to be established was an English company, the European and the

Albert, set up in 1870. The first Indian life company, the Bombay Mutual Assurance Society

Ltd., was also formed in the same year (1870).


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The Concept of Insurance

Insurance is a contractual arrangement whereby one party agrees to compensate another

for losses in return for the payment of a consideration. We call the party agreeing to pay

for the losses the insurer. We call the party whose loss causes the insurer to make a claims

payment the insured. We call the payment that the insurer receives as a premium. We call

the contract a policy of insurance. We call the insureds possibility of loss the insureds

exposure to loss. We say the insured transfers the exposure to loss to the insurer by

purchasing an insurance policy.

The existence of a sound insurance market is an essential component of any successful

economy. This is the reason why banking and insurance have long been recognized as the

twin pillars of trade, industry and commerce.

Every Asset has a value

Assets, such as motorcars, factories or houses, are acquired or built through savings or

borrowings with the expectation of deriving benefits from them in the form of convenience

and comfort they yield or the products they produce that can be sold for earning revenue.

In the extended sense, these assets could be taken to include human life, our health or

even our ability to work and earn. Unlike physical assets, however, the value of human life

cannot be determined since the pain and suffering that follows the disablement or death of

an individual cannot be determined with any degree of precision. There could, however, be

indirect measures such as the earning potential of the individual in the productive years that

were lost due to premature death of disablement.

Human Life Value is defined as the present value of all future income that you could expect

to earn to earn for your familys benefit, plus other value you planned retirement date.

Insurance is designed to provide financial compensation in these situations. A motor

insurance policy pays the expenses of repair, a sickness insurance policy pays the cost of

hospitalization and a life insurance policy pays the sum insured, including accumulated

bonuses, if any, on the death of the policyholder of maturity of the policy. It is, therefore,

said that the function of insurance is to protect the economic value of the asset.


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How does insurance work?

In very simple terms, insurance is a pooling arrangement whereby contributions are

collected from all members who join a pool. The amount so collected is utilized to

compensate members who suffer loss. The arrangement works because generally not all

members who join the pool suffer losses. In order to ensure equity (fairness) a pool would

consist of people who are exposed to similar risks (exposure to loss). An example of a pool

could be persons in the age group of, say, 36-40 and meeting some prescribed set of health

standards and financial standing. Other pools could consist of private cars up to, say, 1000

cubic capacity, buildings made of reinforced concrete up to 22 meters in height, goods

packed in containers in transit carried by ocean going vessels, and so on. There will,

therefore, be several pools

As insurance evolved over the years, insurance companies have come up to transactinsurance business, which have developed expertise in assessing the risk (exposure to loss)

of an individual, a motorcar, a building or goods in transit. On the basis of this assessment,

they decide whether the asset offered for insurance could be covered, and if so at what

premium rate. In a sense they still operate pools since they group together assets or

persons with similar risk profiles (loss exposure) together for the purpose of rating or

charging premium. They also perform a number of other functions including effectively

managing the funds collected that helps to reduce the premium payable by policyholders.

The Fundamental Principles of Insurance

In normal commercial transactions, the legal maxim Caveat Emptor, Latin for Let the

Buyer Beware, operates. This means that the buyer takes the risk regarding the quality or

condition of the property purchased. This, in turn, implies that the buyer has the

opportunity to examine the product before purchase. Since, in view of what is stated in the

preceding paragraph, the insurance customer has no such opportunity, insurance

transactions need be governed by special principles in order to protect the interests of the

contracting parties, particularly the customer.

It is in view of this that the contracts are governed by certain special fundamental legal

principles. These make insurance contracts very unique and different from other kinds of

commercial contracts. As we shall see below, there are, however, differences between life

and general insurance with regard the application of the principles.


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The fundamental principles are:

1. The Principle of Utmost Good FaithThe duty of the insured and the insurer to disclose all relevant facts. This is relevant

to both life and general insurance.

2. The principle of insurable interestThe legal right to insure- it is it must for an insurance contract to have validity. This

principle is also relevant to both life and general insurance.

3. The principle of indemnityIt determines the extent of insurers liability in the case of loss. The need for

determining the liability is however, largely applicable to general insurance alone.

4. The principle of contributionA corollary of the indemnity principle exclusively applicable to general insurance. It

tells us how the liability is to be met when the insured has taken insurance with

more than one insurer.

5. The principle of subrogationAnother corollary of the indemnity principle and again exclusively applicable to

general insurances, refers to the rights that an insurer acquires vis--vis the insured

when the insurer has paid him an indemnity, and

6. The principle of proximate causeThe rule that determines how to proceed with processing acclaim lodged by an

insured, when a loss could apparently be traced to more than one event, some of

which are not covered by the insurance contract.


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INSURANCE ORGANIZATION, STRUCTURE AND FUNCTIONS

Background

As on March 31, 2006, there were 29 insurance companies operating in India. Of these

14 were general insurance companies and 15 life insurance companies, as listed below:

Insurance Companies operating in India as on March 31, 2006 were:

General Insurers:

Serial

No.

Name of the Company Remarks

Private Sector Companies:

1 Bajaj Allianz General Insurance Co. Ltd.

2 Cholamandalam MS General Insurance Co.

Ltd.,

3 HDFC Chubb General Insurance Co. Ltd.,

4 ICICI Lombard General Insurance Co. Ltd.,

5 IFFCO Tokio General Insurance Co. Ltd.,

6 Reliance General Insurance Co. Ltd.,7 Royal Sundaram Alliance Insurance Co.

Ltd.,

8 Tata AIG General Insurance Co. Ltd.,

Public Sector Companies:

9 National Insurance Co. Ltd.,

10 The New India General Insurance Co. Ltd.,

11 The Oriental Insurance Co. Ltd.,

12 United India Insurance Co. Ltd.,

13 Agricultural Insurance Co. of India Ltd., Specialist insurer writing

only crop insurance.

14 Export Credit & Guarantee Corporation

Ltd.,

Specialist insurer writing

only credit insurance.


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Life Insurers:

Serial

No.

Name of the company

Private sector companies:

1 Aviva life Insurance Co. India Pvt. Ltd.,

2 Bajaj Allianz Life Insurance Co. Ltd.,

3 Birla Sun Life Insurance Co. Ltd.,

4 HDFC Standard Life Insurance Co. Ltd.,

5 ICICI Prudential Life Insurance Co. Ltd.,

6 Ing Vysya Life Insurance Co. Ltd.,

7 Kotak Mahindara Old Mutual Life Insurance Ltd.,

8 Max New York Life Insurance Co. Ltd.,

9 Met Life India Insurance Co. Pvt. Ltd.

10 Reliance Life Insurance Co. Ltd.,

11 Sahara India Life Insurance Co. Ltd.,

12 SBI Life Insurance Co. Ltd.,

13 Shriram Life Insurance Co. Ltd.,

14 Tata AIG Life Insurance Co. Ltd.,

Public Sector Company:

15 Life Insurance Corporation Of India


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REGULATION AND LEGISLATURE APPLICABLE TO INSURANCE

History of insurance regulation in India

The Indian Life Assurance Companies Act, 1912 was the first statutory measure to

regulate the business of insurance. Later, the Indian Insurance companies Act was

enacted in 1928 to enable the Government to collect statistical information about life

and non-life insurance business transacted in India.

(a)The Insurance Act,1938

In 1938 with a view to protecting the interest of the insuri8ng public, earlier

legislation was consolidated and amended by the Insurance Act, 1938 withcomprehensive provisions for detailed and effective control over activities.

This Act was amended in 1950, making far- reaching changes such as:

y Requirement of equity capital for companies carrying on life insurance business,y Ceiling on shareholding in such companies.y Stricter controls on investments of life insurance companies,y Submission of periodical returns relating to investments and such other

information to the Controller as called for,

y Appointment of administrators for mismanaged companies,y Ceiling on expenses of management and agency commission,y Incorporation of the Insurance Association of India and formation of councils and

committees thereof.

(b)Salient Sections

Section2 (5A) defines the chief agent as a person who, not being a salaried

employee of an insurer, in consideration of commission:

y Performs any administrative and organizing function for the insurery Procures life insurance business for the insurer by employing or causing to be

employed, insurance agents on behalf of the insurer.


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(d)Insurance Regulatory and Development Authority Act, 1999

After liberation of the financial sector after 1991, the Government of India

constituted the Malhotra Committee for suggesting reforms in the insurance sector.

This Committee recommended the opening up of the insurance sector and suggested

setting up of a statutory body called Insurance Regulatory Authority. In 1996, IRA

was formed and in 1999, the IRDA bill was passed. IRA was renamed as Insurance

Regulatory and Development Authority (IRDA) to reflect on the development of the

insurance sector.

IRDA Act provides for the establishment of an Authority to protect the interest of

holders of insurance policies, to regulate, to promote and ensure orderly growth of

the insurance industry.

The Authority consists of the following members:

(a)A Chairperson(b)Not more than five whole-time members(c)Not more than four part-time members.

Salient Features of the Act

Under this Act, a consumer as an individual or along with other individuals. Or through a

consumer organization, can approach the various forums prescribed under the Act for

redressal, in case he / she is not satisfied with the goods or service provided. He / She has

to allege a defect in goods or services.

In order to attend to complaints under this Act, Consumer Dispute Redressal Forums are to

be established in each district and State. Forums at the district level will hear complaints

upto the value of Rs. 5,00,000 and forums at the state level will hear complaints upto Rs.

20,00,000. Any complaints pertaining to amounts above Rs. 20,00,000 will have to be

heard by the National Commission, which will also hear appeals against the decisions of the

State Forum.


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LIFE INSURANCE AND ITS PRACTICE IN INDIA

Types of Insurance

1. Term insuranceTerm insurance pays a death benefit to the legal heirs if the person insured dies during the

term of the policy.

Such a policy provides cover for a specified period only and may be described as temporary

insurance.

Term insurance plans offer pure risk cover without any element of saving. Hence, they are

the most inexpensive.

2. Whole Life InsuranceWhole life insurance guarantees a death benefit cover throughout the course of life,

provided the required premiums are paid.

The advantage of whole life insurance is that the policy, if kept current, covers you over

your entire life, as opposed to term insurance that covers you only for a certain term of

years. Whole life insurance policies pay out on the death of the assured, whenever it occurs.


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OTHER ASPECTS OF INSURANCE

Surrender value

Surrender value is the cash value of the policy which is payable immediately on cancellation

of the entire contract.

A policy acquires surrender value if the premiums are paid at least for 3 consecutive years.

Guarantees

Certain guaranteed additions are provided to the policy holders under certain conditions.

For example, under certain plans, the sum assured gets enhanced at specified guaranteed

rates at the end of each year. The Guaranteed Additions are payable with the sum assured.

As all of us know, an insurance policy is kept in force only on payment of premiums. What,

then, is this premium and how is it calculated?

Premium

Premium is the price paid by the insured for purchasing the insurance policy, i.e. the plan

and term of assurance for the sum assured chosen by him/ her.

The premium has got to be paid by the insured person at the commencement of the policy

and at regular intervals as specified in the contract.

Normally the insurance companies publish tables of premium rates. These tables give us the

tabular premium. The tabular premium is arrived at as follows :

1. The RISK PREMIUM is first calculated. This is the amount required to meet the risk ofdeath for a given age for a period of one year.

2. The NET PREMIUM is then calculated, taking into account the interest component.


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HEALTH INSURANCE

Individual Mediclaim Policy

This policy covers the hospitalization and domiciliary hospitalization expenses for diseases

suffered during the policy period. It also covers hospitalization for injuries caused during an

accident.

The policy usually covers the following expenses:

1. Boarding expenses in a hospital or nursing home as per the description provided inthe policy.

2. Surgical fees, anesthetist fees, medical practitioner and consultants fees, specialistfees.

3. Nursing expenses.4. Anesthesia, blood, oxygen, operation theatre charges, surgical appliances, medicines

and drugs, diagnostic reports, dialysis, chemotherapy, prosthetic limbs etc.


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Proposal and Questionnaire

Features of the proposal form of Mediclaim :

1. The proposal form gives a prospectus of the benefits and details of cover, particularlythe exclusions and provisions.

2. The insured person consents and authorizes the insurer to seek any medicalinformation about himself/herself.

3. The insured person confirms his consent to the terms and conditions of the policy.4. The insured person confirms that the questions that he has answered about his state

of health are true and can form the basis of the contract.

5. Any detailed medical answers have to be completed by a consulting physician.

Other Covers

1. Bhavishya Arogya PolicyThis is deferred Mediclaim policy that can be taken at any age between 25 and 55

years of age. The retirement age can be selected by the insured at the time of taking

the policy and can be between 55 and 60 years of age.

The amount of the total benefit can be maximum of Rs. 50,000 during the lifetime of

the insured commencing from the date of retirement, and cannot exceed Rs. 20,000

per illness or injury.

2. an Arogya Bima PolicyThis policy was devised to address the smaller covers and people with limited means

of paying the premium.

This policy works like a usual mediclaim policy but differs on the few value addedextras such as:

It does not offer any cumulative bonuses.

It does not offer any medical check up benefits.

The sum assured is limited to Rs. 5000 and the premium is very low as compared to

the regular policy.


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3. Cancer PolicyThere are two Cancer policies offered in India : one is the group policy issued by the

Indian Cancer Society and the other is a Group Policy offered to the members of the

Cancer Patients Aid Association.

In both the cases the insured have to be valid members of the Society/Association to

qualify for the policy. The cover is limited to Rs. 50000 in case of the ICS policy and

can go upto Rs. 2,00,000 in the case of the CPAA policy.

Both the policies require a Cancer checkup prior to taking out the policy and cover

only allopathic mode of treatment including costs of diagnosis, biopsy, surgery,

chemotherapy, radio therapy, hospitalization and rehabilitation.

4. Group Mediclaim PolicyThe group mediclaim policy is available to any cooperate, association, institution and

group of people provided they form the minimum number of persons to be covered

under the policy.

The policy holder in the case of this type of insurance is the group itself and the

premiums are payable by the group. The individual members of the group may enter

and exit the policy upon their becoming or ceasing to be members of the group.


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2. Employee State InsuranceLiability is defined in this Act in relation to injury to any employee while at work. It

defines the limits of such liability on part of the employer

3. Non-industrial RisksThese relates to non-industrial but mainly commercial enterprises such as Cinemas,

Restaurants, Offices, Shopping Complexes, Schools, Exhibitions and Fairs , Shop,

etc.

4.

Professional LiabilitiesThese relate to liability that could arise from the practice of a particular profession.

Medical practitioners, engineers, architects, chartered accountants, directors of the

companies, lawyers and solicitors etc. are covered under this group.

5. Product LiabilitiesThese are liabilities that could arise from the sale of products to customers and

resulting damage to any customer due to a fault in the product. Edible products,

equipment and machinery, clocks and watches, air-conditioner units, chemical

products, motor vehicle tyres, fireworks and explosives, elevators and escalators etc.

are covered under such policies.

6. Directors liabilityA special type of professional indemnity is covered by the directors & officers

liability policy. This is highly specialized policy introduced recently in India. Directors

and certain officers of company hold positions of trust and responsibility in a

company, they become liable to pay damages to shareholders, creditors, customers

and lenders of the company for wrongful acts committed by the company or by them

while in supervision of the company.


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NEED FOR RETIREMENT PLANNING

Importance of starting Early

Table 1 shows the accumulation of Rs.1,000 per year. If you invest for 30 years at a rate of

5 % pa, you get Rs. 83226 at retirement, whereas if you invest only five years prior to

retirement, you get only Rs. 6801. This is the power of compounding. The earlier you start,

the better your position will be at retirement.

Table 1 : The Power Of Compounding

Rates of

Return

5 10 15 20 25 30

5% 6801 15528 26729 41103 59551 83226

6% 6977 16388 29082 46204 69299 100452

7% 7159 17308 31696 52093 81007 121997

8% 7348 18295 34604 58902 95103 149036

9% 7542 19351 37841 66789 112112 183074

10% 7744 20484 41447 75937 132683 226049

The process of retirement planning

The process of retirement planning, we believe, starts with estimating how much one would

need to maintain a comfortable lifestyle when old. Also important is to have an estimate of

how many resources one already has. With these two numbers in hand, one can come up

with an estimate of the gap between what one has and what one wants.

Again, at different ages people are motivated by different go9als. And the amount of

money invested in each of these time periods would therefore differ. While young fewer

resources can be invested for the purposes of old age, the building of corpus must start.


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MEASURING NEEDS

Life Expectancy

One cant really know for sure how long an individual is going to live, and the longer you

plan for, the safer you will be.

Calculating expected monthly expenditure

The monthly expenditure of each person will of course vary depending on their economic

and social background. As a rule of thumb, you can take 50% of the terminal wage rate as

the required figure and plan accordingly. You can also come up with an approximate figure

based on certain parameters that seep through classes. There will be variations based upon

preferences but the underlying calculation would stay the same.


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We think the following would constitute expenditure post retirement:

1. Daily consumption expenditureThis should include things like daily grocery, electricity and telephone bills.

2. HousingHousing will play a crucial role in determining expenditure. If your client has

house of their own, they will only have to factor in maintenance costs, whreas if

they plan to live in a rented house they will also have to factor in monthly rental

expenditure.

3. MedicalThis is likely to be the most expensive item on a persons list of expenditures,

wit old age, medical costs can only be expected to rise. You should factor in two

kinds of expenditures:

a. Those for small and regular ailments.b. Hospitalization expenditures.

4. TravelThis, again, can be factored in two:

a. Daily commutation expenses.b. Outstation travel, if any.

5. HobbiesThis would vary from person to person. Hobbies could be anything from travel to

clubs to movies to reading. Each recreation activity comes at a price, which

should be factored into monthly expenditure.

6. ChildrenIn India even today, the education and marriage of the girlchild are matters of

expense for most parents. Depending on how old the child is, you will have to

factor in these expenses at the earlier stages of retirement.


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Pension Reforms in India

Major problems faced by the pension system in India are:

y Inadequate coverage for old age income securityy Lack of individual choice and portabilityy Lack of multiple pension providers and coveragey Lack of uniform standards and standard regulatory framework

Firstly, the objective of the Government was to design a scheme for new entrants in Central

Government service where contribution is defined, where no extra infrastructure is sought

to be created in Government. New Pension System was announced based on defined

contribution shared equally in the case of Government employees between the Government

and the employees.

Secondly, for organized sector, OASIS (Old Age Social Income Security) project was

commissioned by the Ministry of Social Justice and Empowerment which submitted its report

in January 2000. OASIS report recommended a scheme based in Individual Retirement

Accounts to be opened anywhere in India.

Thirdly, Pension Fund Regulatory and Development Authority (PFRDA) was set up on

December 29, 2004.


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Main features of Chilean pension reform

(source: Holzmann, Robert (1996), Pension Reform, Financial Market Development and

Economic Growth: Preliminary Evidence from chile, IMF Working Paper, Washington:

International Monetary Fund.)

Eligibility and Benefit Structure

Old Age Benefit

y Defined contribution plan with individual accountsy Individually accumulated funds can either be converted into an annuity with a

insurance company or withdrawn in phased sequences.

y Retirement age is 65 for men and 60 for women.y Early retirement is possible if the accumulated funds allow for a replacement rate of

at least 7 per cent of indexed tax income over the previous 10 years.

Disability andSurvivalBenefit

y Available under defined benefit plan with an extra insurance.Minimum pension cover

y It covers old age, disability and survivorshipy Benefit is guaranteed by the Governmenty Financing starts only once individually accumulated funds are exhaustedy Eligibility requires are least 20 years of contribution and income tested.


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Coverage

y All new entrants to the labour market as dependent workersy Self-employedy Insured dependent workersy Self-employed under the existing social security system (or remain in the existing

scheme)

Organization

y Private pension funds: Provide fund management services Record keeping of individual accounts Purchase the group insurance policy for invalidity and survivorship Perform collection and payment function Cover operating cost and profit through fees

y Affiliates (employees ) are free to select any fund and to switch anytime afterminimum of four months with the fund.

y Funds operate under tight regulations and supervision from the superintendency ofpension funds.

y Comprehensive disclosure obligation and the fund operator has to guarantee aminimum rate of return.

y Only if the guarantee bond posted with the government is insufficient willGovernment funds become involved.

y Investment rules are tight and gradually relaxed over the years: Purchase of domestic share in 1985 Investment in foreign asset in 1990 More flexibility I risk classification of assets


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TAXATION

Tax laws in India have all along encouraged the purchase of life insurance and health

insurance. In case of the life insurance policies, until financial year 2004-05, the incentives

was in the form of deduction depended from the amount tax payable. The extent of

deduction depended upon the tax bracket applicable to the individual. At lower levels of

taxable income, the deduction from the tax payable was to the extent of 20% of the life

insurance premium paid. However, individuals with taxable income in excess of Rs.

5,00,000 were not being eligible for any relief at all.

Public Provident Fund

The interest income earned in the PPF and the lump-sum amount received on maturity or

premature withdrawal is completely tax-free as per the provisions of the Income-tax Act,

1961. The scheme also offers tax benefits on the amount invested every year. Thus, on an

annual investment of Rs. 70,000 , an investor can reduce maximum tax outgo by Rs.

21,000 (exclusive of cess / surcharge).

Accounts can also be opened in the name of a spouse or children, including married

daughters and tax rebates claimed on those investments as well, provided the contribution

is made out of your personal taxable income.

Taxation Of Provident Fund Balances

The final amount payable at the age of retirement to a beneficiary of provident funds

recognized under Schedule 4 of the Income-tax Act, 1961, subject to the provisions of rule

8 of Part A of the fourth schedule, which specifies that if the period for which the employee

has been in continuous service and contributing to a recognized PF is less than five years

then the amount payable is subject to taxation. This tax is calculated and collected in

accordance with the provisions of rules 9 and 10 of the same.


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The major provisions are reproduced below :

1. Section 10 of the I.T. Act, 1961(11) any payment from a provident fund to which the Provident Fund Act, 1925 (19

of !925), applies or from any other provident fund setup by the Central Government

and Notified by it in this behalf in the Official Gazette.

(12) the accumulated balance due and becoming payable to an employee

participating in a recognized provident fund, to the extent provided in rule 8 of Part A

of the Fourth Schedule;

2. The Fourth Schedule of the I.T. Act, 19618. Exclusion from total income of accumulated balance

The accumulated balance due and becoming payable to an employee participating

in a recognized provident fund shall be excluded from the computation of his total

income-

I. If he has rendered continuous service with his employer for a period offive years or more, or

II. If, though he has not rendered such continuous service, the service hasbeen terminated by reason of the employees ill-health, or by the

contraction or discontinuance of the employers business or other cause

beyond the control of the employee, orIII. If, on the cessation of his employment, the employees obtains

employment with any other employer, to the extent the accumulated

balance due and becoming payable to him is transferred to his individual

account in any recognized provident fund maintained by such other

employer.

Explanation : Where the accumulated balance due and becoming payable to an employee

participating in a recognized provident fund maintained by his employer includes any

amount transferred from his individual account in any other recognized provident fund or

funds maintained by his former employee or employers, then, in computing the period of

the continuous service for the purposes of clause (i) or clause (ii) the period or periods for

which such employee rendered continuous service under his former employer or employers

aforesaid shall be included.


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9.Tax on accumulated balance-

1. Where the accumulated balance due to an employee participating in arecognized provident fund is included in his total income owing to the

provision of rule 8 not being applicable, the income tax officer shall calculate

the total of the various sums of the tax which would have been payable by

the employee in respect of his total income for each of the years concerned if

the fund has not been a recognized provident fund, and the amount by which

such total exceeds the total of all sums paid by or on behalf of such employee

by way of tax for such years shall be payable by the employee in addition to

any other tax for which he may be liable for the previous year in which the

accumulated balance due to him becomes payable.

2. Where the accumulated balance due to an employee participating in arecognized provident fund which is not included in his total income under the

provisions of the rule 8 becomes payable, an amount equal to the aggregate

of the amounts of the super-tax on annual accretions that would have been

payable under section 5 and E on the Indian Income-tax Act, 1992 (11 of

1922), for any assessment year up to and including the assessment year

1932-1933, if the Indian Income-tax (Second Amendment) Act, 1933 (18 of

1933), had come into force on the 15th March, 1930, shall be payable by the

employee in addition to any other tax payable by him for the previous year in

which such balance becomes payable.

10. Deduction at source of tax payable on accumulated balance-

The trustees of a recognized provident fund, or any person authorized by the

regulations of the fund to make payment of accumulated balances due to

employees, shall, in cases where sub-rule (1) of rule 9 applies, at the time anaccumulated balance due to an employee is paid, deduct there from the

amount payable under the rule and all the provisions of Chapter XVII-B shall

apply as if the accumulated balance were income chargeable under the head

Salaries.


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Mutual Funds And Taxation

The tax benefits for investing in mutual funds are as follows :

Section 80Cof the I.T. Act

Contribution for participating in the unit linked insurance plan (ULIP) of UTI or any mutual

fund. In addition investment in units of a mutual fund proceeds of which are utilized for the

development, maintenance etc. of a new infrastructure facility are too eligible for tax

benefits.

Section 54ECof the I.T. ACT

In place of sections 54EA and 54EB, which are being terminated, a new section namely

54EC has been inserted for transfer of capital assets made on or after 1 April, 2000. The

new section will allow exemption from tax on long-term capital gains, if invested in bonds,

targeted exclusively at agricultural finance and highway infrastructure. The instruments in

question shall be bonds, redeemable after three years, to be issued by the National Highway

Authority of India (NHAI). Rural Electrification Corporation Ltd. The exemption from long-

term capital gains shall be to the extent of investment in these bonds.

Section 115R of the I.T. Act

The mutual fund is completely exempt from paying taxes on dividends/interest/capital gains

earned by it. While this is a benefit to the fund, it indirectly benefits the unit holders as well.

A mutual fund has to pay a withholding tax of 10% on the dividend distributed by it under

the revised provisions of the I.T. Act, putting them at par with corporate.

Section 10(33) / 10(35) of the I.T. Act

The investor in a mutual fund is exempt from paying any tax on any income/ capital gain on

transfer of the mutual funds are treated as capital assets and the investor has to pay short-

term capital gains tax on the sale proceeds of mutual fund units sold by them. For

investment held for more than one year no tax is payable.


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The proposal system envisages setting up individual accounts in which every individual will

make consistent contributions. Pension fund managers will manage these accounts and

make investments as per the decision of the individual. At the time of retirement the

accumulated corpus can be withdrawn or annuitized. With this system in place, the huge

mass of the Indian population will have an avenue for formal retirement planning.

With a new system in place, the role of pension fund managers will become important in

managing investments, and so will that of the financial advisors. With pension reforms on

the way, the demand for retirement planning is likely to increase considerably.

insurance done

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