FM presented fairly pragmatic budget:

The budget re-affirms the FMs intent to adhere to DTC datelines.

We believe that the FM has presented a fairly pragmatic budget despite the pressing populist demands. Insurance Bill We are pleased to note that the Government is re-iterating the intent to table the various financial sector bills in Parliament. We will await some progress on this. DTC The budget re-affirms the FMs intent to adhere to DTC datelines. Therefore the final draft of the discussions which will be released later this year assumes importance. We will await the release of this paper to see if the industry’s demands earlier put forward will find mention in the discussion paper. These were in the areas of taxing the maturity proceeds of life insurance policies and the taxation format. If these are not considered, it will adversely impact the life insurance business and the industry. If the proceeds are taxed (EET), it will discourage investors to invest in long-term savings as it may result in unjustified tax burden especially on those customers who do not avail the benefit under Section 80C. The existing policy-holders who have made the investment on the basis of existing tax structure (EEE) needs to be protected if EET is implemented. Currently, the first two stages under the life insurance policies ie., investment and accretion are not completely tax fee. At the time of investment, the tax benefit is available only upto the maximum limit of 1 lakh and subject to the condition that the sum assured is at least 5 times of the annual premium. Further, accretion is taxed as Life Insurance companies are required to pay tax at the rate of 12.5% on the surplus and service tax at 10% is on all charges including mortality charge and commission paid to the agents. Service Tax on traditional insurance policies The FM has proposed to levy service tax on the investment component of the traditional life insurance policies. Under such policies insurers do not levy a separate fund management charge. Therefore, how the taxable value will be determined is yet to be notified by the Government. Under the current framework in case of traditional life insurance policies, service tax is applicable only on the mortality premium. Therefore, in case of pure term life insurance policies normal service tax rate of 10% is applicable. However, in case of traditional endowment life insurance products wherein it is not possible to segregate the mortality premium and the premium attributable to investment, service tax is payable at a gross rate of 1% of the total premium. It is important to underline that the traditional policies follow a conservative investment strategy wherein at least 65% of the funds are mandatorily invested in Government Security and Infrastructure Bonds and these provide fixed benefit to policyholders. Having offered fixed benefit, insurer manages its fund to meet the guarantee like a Fixed Deposit. Therefore as such there is no direct service to policyholder. While we still need to examine the proposal in detail, however if indeed this is the intent, then the proposed service tax will make traditional policies costly for policyholders.