Dr. Sanjiv Agarwal
The tug of regulatory war over unit linked insurance plans (ULIPs) has ended with regulatory regime to be retained with insurance regulatory body (IRDA). The Central Government has promulgated an Ordinance (legislation) to the effect that ULIPs shall be regulated by IRDA only, thus ending the ongoing claims by both regulators- SEBI and IRDA to regulate the ULIP schemes.
The Ordinance signed by the President last week makes the law that life insurance shall include any ULIP or similar instruments. This sets at rest the controversy , though done belatedly. The dispute is also pending before the Supreme Court and it was the Ministry of Finance only which asked both the regulators to move the court to decide jurisdictional issue over ULIPs. Supreme court will now have to take cognizance of Ordinance when hearing takes place on 8th July2010.
While SEBI had in April 2010 barred insurance companies to float ULIP schemes without its approval, IRDA on the other hand, issued a directive not to follow SEBI dictat . It was for the Finance Ministry to have brought an Ordinance at that stage itself rather than directing the two to go to court. Interestingly, both IRDA and SEBI come under Ministry of Finance. With new Ordinance which changes the law in relation to banking, capital market and insurance and w.e.f. 18th June 2010, insurance companies can now legally sell ULIP products and IRDA can regulate the same. Life insurance products shall hence include any unit linked insurance polices or scripts or any such instrument . In order to have clarity on such other products, the Government has also constituted a high level committee under the Chairmanship of Finance Minister for sorting out all jurisdictional issues in relation to hybrid products.
Now that IRDA has won the war over jurisdiction of ULIPs, it becomes imperative for IRDA to infuse transparency in the costs and expenses in ULIP expenses which are charged to the fund and the investment made on behalf of the ULIP investors. Particularly, marketing expenses and distribution commission needs to be under control and made transparent, as in case of mutual funds. It is expected that IRDA will shortly come out with new set of guidelines for investment and operation of ULIP schemes.
Under the revised Direct Tax Code released recently, which will form the basis for new income tax law, ULIP investors are likely to lose the income tax exemption as only pure insurance products will have a tax shelter of exempt, exempt, exempt (EEE) tax regime and ULIPs would be treated like mutual funds, despite the fact that central government has now promulgated a Presidential Ordinance by making it legally clear that ULIP is an insurance product and that it would be regulated by Insurance Regulatory Development Authority (IRDA).
Presently, ULIP investors do not pay tax at any stage- be it investment, accumulation (distribution) or maturity ( withdrawal) and section 80 C of income tax provides such exemption. This exemption is considered to be a major reason for ULIPs being popular amongst investors so much so that ULIP investments contribute over fifty percent of all investments in insurance schemes in private sector. Under the new Code, only schemes like PPF, pension scheme, general and recognized provident fund, pure life insurance policies , annuity schemes etc will enjoy tax exemption at all stages. For ULIP schemes which are in force prior to new tax law comes into force, the benefit of EEE would continue to be granted.
While the exact tax treatment would be known later only, it makes sense to buy a ULIP scheme now.
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