Insurance companies have asked the government to shift to the new tax regime under the Direct Tax Code only for those policies sold after the proposed Code came into effect from April 2011.

The draft code, circulated for public comments, had suggested that life insurance policies should be taxed at the time of maturity. So, the contribution and accumulation would be exempt from tax payments, but the government would levy tax on the withdrawal amount.

The exempt-exempt-tax (EET) method of taxation is proposed to be introduced from April 2011 and would also cover policies purchased before the cut-off date.

On its part, the Life Insurance Council, the industry lobby, has suggested that only policies sold from April 2011 should be subjected to the new system of levy.

The companies argued that it would be unfair on individuals who had purchased a cover after factoring in possible returns. Through the Direct Tax Code, the terms were proposed to be changed mid-way through the policy term.

A person who started saving early did not know that the maturity amount would be taxed. We would like to protect his investment. There are a number of issues which needs to be addressed," said Life Insurance Council Secretary General SB Mathur.

Life and general insurance companies are demanding a reduction in the proposed rate of minimum alternate tax (MAT), proposed at 2 per cent, to 0.25 per cent on the grounds that the rate suggested in the draft document was too high.

Further, insurance companies are seeking an exemption from the payment of tax on the profit derived from the sale of investment. "The general insurance industry has reported underwriting losses of around Rs 4,732 crore during 2008-09. The implementation of the new tax code will bring down the investment yield substantially," said SL Mohan, Secretary General of General Insurance Council.

Most general insurance companies make provisions for underwriting losses through treasury gains and end up reporting profits.

"The grandfathering provision would reduce the tax burden on investments for some time, but the real issues such as MAT would still be relevant," said Bajaj Allianz General Insurance's Chief Executive Officer Swaraj Krishnan.