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Ulips: tax up, returns down
June, 09th 2008

The biggest propeller of this growth has been the unit-linked insurance plans (Ulips) which have, according to some estimates, accounted for nearly 90% of the new business being generated by life insurers

Undoubtedly, the life insurance industry has been growing at a steady pace over the last few years. A low 2.6% contribution to the GDP figure in 2006 it rose to 3.26% and 4.09% in 2006 and 2007, respectively. The biggest propeller of this growth has been the unit-linked insurance plans (Ulips) which have, according to some estimates, accounted for nearly 90% of the new business being generated by life insurers.

The new edict:The finance Bill 2008-09 has brought the management of Ulips of life insurance companies under the service tax net. The mortality portion of the premium was already being taxed. The direct impact of this, however minimal, would be on the fund value of the policyholder.

What gets taxed: The charge is on the service provided by the insurer to the policyholder. The amount charged for levy of service tax will be the difference between the premium paid and the investible amount segregated for actual investment (including the mortality). For example, on a premium of Rs100, if the mortality charged is Rs10 and the investible amount is Rs85, then the service tax is to be charged on Rs5, that is 100- 95 (10+85).

In simple words, the service tax of 12.36% on Ulips is going to be charged on the entire amount that the insurer keeps after deduction of mortality charges and the investible amount. Much of it is reflected in the front-end premium allocation charge. So, the higher the charge, the higher the impact. Nitin Chopra, CEO, Bharti AXA Life Insurance Co. Ltd, says: By placing the allocation charges of Ulips under the service tax fold, while the entry load of other market-led instruments are not, Ulips are not being provided a level playing field.

Elsewhere: In mutual funds, the service tax is charged only on the asset management charge. This fee is only a part of the recurring charges that the fund house can charge based on the size of the corpus. Usually, it is 2.25% of the corpus. The asset management charge is part of this and capped at 1%.

Anil Sahgal, director of strategy and chief investment officer, Aviva Life Insurance, says: The intent of the Budget speech was to bring equity between mutual funds and Ulips which, perhaps, is not the case according to the illustration given in the Finance Bill.

Further, the industry feels the tax will hurt insurance penetration in India. Chopra says: Indian customers prefer investment-cum-insurance plans. Ulips, as a category, promote the value-added benefit of market-led investment. Hence, Ulips need to be supported on the tax front to improve insurance penetration in India.

The impact: The service tax will lower the returns for a Ulip holder. Says V. Srinivasan, chief financial officer, Bharti AXA Life: Our analysis indicates that the internal rate of return (IRR) to customers on our products will reduce by 20-40 basis points per annum over a 15-year holding period, on account of this service tax. This would hold true for most other insurers as well. Shikha Sharma, CEO and managing director, ICICI Prudential Life Insurance, says: The service tax, perhaps the net of input credit on service tax available to the life insurance company, will likely be passed on to the consumer. As such, there will be no change in the expense ratio of the life insurance company.

What to do: As various components of the premium of a Ulip are under the service tax net, the overall tax incidence for customers has gone up.

Look for plans that have a low upfront premium allocation charge. However, that does not mean that overall returns would be higher as insurers might resort to higher policy administration and fund management charges. A better way to view the cost-adjusted returns of any Ulip of any insurer is to get hold of the net yield figure.

Will gold get back its shine?

The poor demand for gold witnessed over the last seven months is expected to turn now. As gold prices soared since September 2007, retail buyers kept out of the market. With festivals around the corner and expectations of a good monsoon, experts believe that demand for gold is set to pick up this year. Prices have now fallen 15% from its record highs and this will lead to a spurt in demand, say analysts.

Record prices had cooled the demand in India and imports had fallen by 30% in the three months ended 31 March. Gold exports in March were less than half that of the previous year. Gold buyers preferred to sell old jewellery and buy new ones instead of paying cash for gold. A recovery in demand in India may help push up global prices that have declined to less than
Rs11,370 per 10g for the first time in more than three months

Gold is quoting at Rs11,963 per 10g in the spot market currently. Any significant drop in prices, however, is not immediately expected as oil prices and inflation continue to soar. Most analysts predict an average of Rs11,000 per gram for gold for this calendar year.

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