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Insurance: Pay 3% or 1.5% Service Tax Now

Till last year, service tax was chargeable on the premium you paid for Term insurance policies. Even in ULIPs the service tax was only charged on the portion related to “mortality charges”, if it was indicated in the policy. For money-back, endowment or other “traditional” policies, no service tax was charged.

(The official excuse: Since you’re investing and getting back money, you don’t pay service tax. But insurance is not considered an investment asset, according to the Income Tax act. It is an expense to buy it, and an income when you get money from it. Some of this money is exempt from taxes, but as we are finding out, tax law changes will change these exemptions to our detriment.)

In Budget 2012, Service Tax of 3% will apply to the first year’s premium of any non-term policy, and 1.5% to subsequent year’s premium. 

This will apply to all policies, including past policies, it seems. I cannot see anywhere that it disqualifies those policies but I’ve made mistakes before. (Please let me know if you notice!)

References: Memorandum 2 (See note 3 under “SERVICE TAX”) and Service Tax Notification 03/12 [ search for sub-rule (7A) ]

  • km says:

    “Life insurance service: Where the entire premium is NOT towards risk cover, the first year’s premium shall be taxed at the rate of three per cent. while subsequent premia shall attract tax at the rate of 1.5 per cent. Availment of full cenvat credit is being allowed.”
    The link you mentioned refers to policies where the entire premium is NOT risk premium. Thus ULIPs, Term etc do not fall under this category since some part of the premium is risk premium, or did I miss something???

    • This is just the memorandum, an explanation, where it mentions that hte idea is to tax policies that don’t ONLY serve risk premiums. The real clause in the ST change says a) pure term policies have 12% ST and now b) everything else has 3% on first year and 1.5% on subsequent years.
      ULIPS and Endowments and every other kind of policy will get hit.

  • km says:

    Ok. Got it.
    Purely from a linguistic angle, “entire premium is NOT risk” cover leads to 2 possibilities
    a) 100% of the premium is in non risk… some life policies in the pension space have/had this feature
    b) Part of the premium in risk, and part in non risk (ULIPs etc)
    My immediate sense was a)…. but you are saying its a+b