Be prepared to shell out service tax for traditional life insurance policies and see a reduction in designated units on unit-linked insurance plans (ULIPs) offered by private insurers.

For instance, the PLI (Postal Life Insurance) directorate of India Post has decided to collect the service tax on insurance premium from all PLI and rural PLI policy holders with effect from January 1.

The service tax works out to 3.09% (including education and higher education cess) of the gross premium during the first year and 1.545% (including education and higher education cess) from the second year. It is being collected from the policy holders separately and a consolidated receipt is being issued for the total amount i.e. premium plus service tax.

But officials from India Post, Chennai city region state the additional imposition of service tax won't have much impact on their overall business. "The additional 3% (service tax) on premium is a very minuscule amount. In any case, the bulk of our PLI (postal life insurance schemes) are on auto debit mode and now the service tax would also be debited in addition to premium," post master general, Chennai city region, Mervin Alexander said.

The Chennai city region of India Post currently has 3.16 PLI policies and 6.57 lakh RPLI policies in force. The average policy size in RPLI ranges from Rs. 50000 to Rs. 1 lakh in the region while in the case of PLI the average size was Rs. 5 lakh in Chennai city region.

The service tax has been expanded to cover a whole host of charges including policy administration and allocation charges, mortality charge and fund management charges on ULIPs by some private insurers recently.

Though the service tax will not impact the annual premium amount, it will result in lower units for ULIPs. "The tax will be adjusted by deducting the equivalent units from your account or by levying the same on the investment fund held by and on your behalf, as may be decided by the company from time-to-time," Aegon Religare said in its letter to a ULIP policyholder.

"We could not effect service tax on unit-linked plan charges in our plans after the union budget announcement a couple of years back. That was because our systems were not compliant to capture this earlier," chief distribution officer of Aegon Religare Amit Kumar Roy said.