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Life cover set to cost more with new tax proposals
July, 04th 2007
The premium on life insurance policies is slated to rise, as the finance ministry is likely to levy service tax on the fund management fees or the investment part of those policies. A decision on this issue will be taken in the next few weeks.

Over half the policy holders in the country use life insurance as an investment tool and for various tax saving purposes. Around 85% of consumers prefer policies that provide risk benefits as well as investment opportunities.

Bringing fund management fees or the investment part of policies within the tax net will boost the governments revenue significantly.

Service tax is already levied on the risk premium part of life insurance policies. Banking and financial services is estimated to be the second largest contributor to the governments service tax kitty.

We are of the view that the investment part of a life insurance policy must be brought under the tax net. There is no reason why the investment component should not be taxed, especially when the risk part of the policy comes under the tax net, an official source told FE, adding that a notification to this is expected to be issued by month end.


Service tax is already levied on the risk premium part of life insurance policies
Finmin is in discussions with various stakeholders before taking a decision
Life insurers, however, do not expect any major impact on balance sheets

Insurance companies levy fund management fees to meet expenses arising from managing funds in unit-linked insurance plans (Ulips).

The cost is absorbed by the policyholder and is factored into the market value of the Ulip. The ministry is already in discussions with various stakeholders, including the Insurance Regulatory Development Authority.

Last month, the government also asked life insurance companies to give their views on the issue.

Life insurance companies, however, feel that the imposition of service tax on the investment component of the life insurance policy would not have any major impact on the industry or on their balance sheets.

Even if service tax is levied on the investment part, it would not be a significant amount for an individual customer and we feel that it would not deter growth in the sector in any way, said a senior official at Max New York Life.

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