Indian Union Budget 2011-12 : Effect of Service Tax increase on ULIP

by khalid on 03/03/2011 · 6 comments

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%.

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{ 4 comments… read them below or add one }

Rajeev Bhatia March 6, 2011

I would like to know, from 2011-12 onwards, the premium pays under ulip plans, will be the part of tax saving of 1,00,000 or not?

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khalid March 6, 2011

In budget 2011-12, there is no mention that premium pays under ULIP plans will not be the part of tax saving of 1,00,000 limit.

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JAYANTA PAUL May 12, 2011

With the change in service Tax whether renewal premium for traditional plans will be changed ?
who will born the additional service tax on renewal premium for traditional plans ?

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JAYANTA PAUL May 12, 2011

Whether change of service tax will effect renewal premium of traditional plans ?

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