The proposed increase in the service tax on life insurance products will make both traditional and unit-linked insurance plans, or Ulips, more expensive. The industry expects the costs to go up by 50-75 basis points (one bps = 0.01%).

Although companies are yet to figure out the impact of the proposed increase, most insurance executives said premiums may go up by as much as 75 basis points.

"Policies are going to get costlier with the increase in service tax. While traditional plans will cost nearly 50 basis points more, Ulips may see a 75 basis points increase," said SB Mathur, secretary general, Life Insurance Council.

The budget for FY12 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.

"This taxing of the allocation charges and policy administration charges will affect the yield, and we envisage at least 20-25 bps reduction in yield for the policyholder," said G Srinivasan, CFO, Bharti Axa Life Insurance.

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%.

P Nandagopal, managing director of India First Life Insurance, said there is no clarity on whether the service tax will come under the charges prescribed for Ulips. "In case it is outside the 3% cap, the premium will go up for policyholders. If it is within the prescribed cap, insurers will have to control expenses well."

"The increase in service tax will increase the cost of insurance for policyholders," said GV Nageswara Rao, managing director and CEO of IDBI Federal Life Insurance Company.