Under the existing provisions, the service tax is 3.5% on first year premium and 1.75% on the subsequent year premium and service tax on single premium is charged at 3.5% for all life insurance products.
The taxes imposed on your insurance products may get cheaper if the finance minister listens to the rationale for cost effective insurance products. Insurance products are double taxed and it is this anomaly that insurers want to be lifted. Service tax is levied on insurance premia and at the same time TDS is being deducted on the entire maturity amounts resulting in double taxation on policy holders.
Under the existing provisions, the service tax is 3.5% on first year premium and 1.75% on the subsequent year premium and service tax on single premium is charged at 3.5% for all life insurance products.
LIC and other companies have sought for the removal of service tax on life insurance products. They say if at all service tax is to be charged, it should be reduced to 1.5% on other than single premium and 0.3% on single premium. The service tax is also impacting the collections of new premiums, resulting in fewer life insurance products being sold in the country.
Life insurance companies led by LIC have also called for the lifting of service tax on annuity and pension plans. As per rule 6(A), a service tax is payable on the gross premium after deducting the investment profit, provided the same is disclosed separately in the policy document at the rate of 14%. In other cases, 3.5% is charged on total premium as the investment portion is not separately disclosed for annuity plans.
A senior General Insurance officer said, “The service tax implications have resulted in the dip in the growth rate of new business in 2015-16 which will ultimately affect the accretion figure of life fund. We have submitted our recommendations to the government.”
LIC, as per Irda regulations, has to invest at least 50% of the accretion in Central and state government securities and minimum of 15% in infra and social sector. Till May 2011, only risk premium component in the premium were liable or service tax at the 10.30% and 12.36%. From May 2011, for endowment policies where premium component contains risk premium and saving portion, the rate is 1.54%.
This rate was again revised to 3.09% for first premium and single premium. Even pension and annuity products were made taxable.
Where the entire premium is towards risk cover, such as pure term insurance products, health products, the rate was 12.36% initially and as per the Finance Act 2015, the service tax rate was further increased to 14% from 12.36% and proportionate increases in endowment policies is 3.5%.
A senior insurance official said, “A parity should be brought between other retirement products like PPF, EPF, NPS, annuity retirement products floated by mutual funds. In the absence of social security schemes, individuals have to invest in such plans to take care of their retired life. Due to the tax structures, life insurance products are unattractive.”
Anuj Gulati, managing director and chief executive officer, Religare Health Insurance Company said one enjoys tax benefits by purchasing health insurance for herself or her dependents, but the lowest income earners, who are not into the income tax net, do not derive any benefit by buying insurance. They pay a tax of 14.5% service tax on the health insurance that they purchase. A tax holiday should be given on base-level policies that have a certain minimal level of annual premium in order to promote the penetration of health insurance in the segments of society that need it the most, he said.
With inflation in the country being fuelled by higher medical costs, the cost of hospitalisation is often debilitating the finances of the common man.
So tax incentives should be stepped up or these products should be rationally taxed so that there is a wide use of these products.
Following the Direct Tax code 2010 provisions, premiums paid in excess of 10% of the sum assured are no allowed for deduction under 80C of the Income Tax Act.
Similarly, exemption under 10(10D) is not allowed if the ratio of premium with sum assured exceeds 10% with effect from the financial year 2012-13.
Here, exemptions are allowed for life insurance policies with premium not exceeding 10% of the sum insured. But insurance companies say that benefit will accrue for the investor only if the exemption is allowed on the basis of the term of the policy, that is, for policies with term of 10 years and more.
In an insurance policy, premium amount is locked for the policy term.
Miranjit Mukherjee, chief financial officer, Tata AIG said in a note, “The government is working on a cashless health insurance scheme for senior citizens in the Budget. As per the proposal, government would subsidise the premium for those below the poverty line.”
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