Finance Minister Pranab Mukherjee has proposed an increase in service tax on life insurance products. This move will effect unit linked insurance plans like ULIP. So these ULIP’s will be more dearer to the investors and they have to pay around 0.75% more with premiums. However traditional plans pf LIC’s will cost nearly 0.50% more.
The budget for FY11-12 has proposed a 50% increase in service tax for traditional plans – where investments from the premium collected are made as per the regulatory guidelines. Currently, policyholders of traditional endowment or moneyback plans need to pay 1% of the total premium as service charge.
In ULIPs, where the policyholder chooses the investment mix (how much to put in equity or debt), the service tax will be charged on the portion of the premium not allocated for investment, like premium allocation and policy administration charges. At present, the service tax is only on mortality and fund management charges.
A senior executive of a life insurance company said efforts made by the Insurance Regulatory and Development Authority, or IRDA, to increase the returns for policyholders by capping the charge will get neutralised to an extent. Insurers, however, are not clear whether the service tax will be part of the 3% cap on the total charges.
Last year, IRDA had put a cap on various charges, including surrender and fund management charges. The difference between the gross and the net yield is capped at 3% for policies with less than 10 years of maturity; for policies with a maturity of more than 10 years, the difference is capped at 2.25%.Google+