Life insurance cover to cost 12.36% more from 1 January

24 Dec 2013

The government has widened the base of service tax to include insurance policy premiums paid by holders of life insurance policy, including that of Life Insurance Corporation (LIC) of India.

Accordingly, the cost of life cover will go up by a steep 12.36 per cent across the board beginning 1 January 2014.

The service tax rate on traditional life insurance products has been set lower at 3.09 per cent as most of the premium goes into savings. For term plans and unit-linked insurance policies (only on charges, such as mortality and administration), it will be 12.36 per cent.

With this, premiums being paid by the policyholders of Life Insurance Corporation will also go up.

The tax rates differ from product to product, and the final guidelines on the modalities of service charges to be levied on the risk premium (excluding savings component) are expected to be worked out in a week.

Insurance companies will specify the amount of tax impost and other details of each product.

Most private insurers have already started collecting service tax separately.

The service tax impost is expected to have an adverse impact on insurance business and insurers expect several policy holders to terminate or cut short policies once the service tax is added to the premiums.

The service tax impost is against the wishes of the industry as also the sector regulator, both of whom have argued against the impost, which was announced in the year's budget proposals.

Insurance regulator IRDA has also written to the finance ministry about the need to make insurance more tax-payer friendly, but with little success.