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Service tax on Ulip to jack up premium

Mumbai, March 16: Unit-linked insurance plans (Ulips) will become more expensive from April following the decision to impose a service tax of 12.36 per cent a year on the insurance companies offering such products.

Insurance companies believe that the move will eventually require the policyholders to pay a higher premium, which may impact the sales of Ulips and deter the growth of the insurance industry.

Ulips, unlike mutual funds, do not attract any service tax against the asset management fees charged to the policyholders. Based on the sum assured and the contribution for the policy, the insurer deducts charges towards life insurance mortality charges — risk premium, administration charges and fund management charges.

The rest of the premium is invested in funds that put money in stocks or bonds.

At present, the annual asset management charges for Ulips vary between 0.7 and 2 per cent of the net asset value of the product.

The industry wants the government to clarify whether the service tax will be levied only on the fund management portion or the overall charges of the fund.

“Assuming that the service tax is levied on the overall amount that is charged to the policyholder, the premia for Ulips could go up about 60 basis points. If the service tax is imposed only on the fund management charges, the premia could go up by 10 to 12 basis points. Accordingly, the returns will also get affected,” Puneet Nanada, chief investment officer at ICICI Prudential Life Insurance, told The Telegraph.

The policyholder’s share in an Ulip fund is represented by the number of units held in his account. The value of the unit is determined by the total value of all the investments made by the fund divided by the total number of units.

An insurer charges the fund management fees according to the net asset value (NAV) of the policyholder’s investment on that particular year. For instance, if an insurer charges a fund management fee of 1 per cent to the investor on an investment of Rs 1 lakh, the investor would be charged Rs 1,000 annually as fund management expenses.

Imposing a 12.36 per cent service tax on Rs 1,000, the investor would have to pay Rs 123.60 extra on his Ulip according to the budget proposal. This figure will keep progressing as the total investment amount goes up every year. As a result of this hike in fund management fees, the premia in Ulips will go up.

“Customers have to take a long-term call while investing in Ulips. However, we are still seeking clarification if the tax will be levied on the overall expenses or only the fund management charge,” Nanda added.

Investment instruments such as Ulips have witnessed unprecedented growth over the past few years.

On an average, about 50 to 70 per cent of the business premium of insurance companies come from Ulips today. Industry estimates indicate that the privately held insurance companies alone have a total corpus of about Rs 75,000 crore invested through Ulips.

Although Ulips generate fair capital appreciation in the longer term than the mutual funds, high fund management expenses eat into investors’ returns in the initial years, which make them unattractive compared with mutual funds for short term investors. The budget proposal will take the overall expenses in Ulips still higher, which may affect the sales of such insurance-linked products.

“The move will certainly have a major impact on sales and growth of Ulips for the insurers. As the insurers have only a thin operating margin on such products, the companies will not be able to offset the service tax expenses without passing it to the investors, which will eventually make these products more expensive. The tax authorities have directed us to apply the service tax for the existing Ulips as well,” said SBI Life Insurance deputy-CEO Pier-Paolo Dipaola.

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