Insurance policyholders could be in for a bonanza once the new Direct Taxes Code, or DTC, comes into effect, as insurance firms may pass on the tax benefit proposed in the bill. The new income-tax law tabled in Parliament has exempted the policyholders’ fund, the investment corpus created from premium payments, from the 12.5% tax on income earned.
“The DTC proposes to exempt the policyholders’ fund from the 12.5% tax,” a Central Board of Direct Taxes official said.
Insurers are likely to pass on this benefit to policyholders of popular schemes such as money back and endowment plans as additional bonus, which will make these schemes more attractive. High returns is a key in the Indian market, where insurance plans are seen more as investment products than risk cover.
The bill proposed to levy a 30% tax on the shareholders’ fund against the current 12.5%. The change will mean that while income of insurance companies will now be taxed at the corporate rate, the earnings of funds accumulated on behalf of investors will not be taxed.
Until now, for tax purposes, both the funds were treated as one consolidated entity and taxed at 12.5%. Life Insurance Corporation has the largest fund and its policyholders could be a major beneficiary.
Depending on the performance of the policyholders’ fund, insurance companies credit bonus, or dividend, to the policyholders from time to time.
“The bonus for policyholders could go up if this is the case,” confirmed a senior LIC official who did not wish to be named.
LIC also does not have any shareholder funds. The surplus, net of taxes, is distributed between policyholders and government in the ratio of 95:5. So, while the government will lose tax, it will gain in dividend.
The DTC bill provides a Rs 50,000 exemption for premium paid for life and health insurance and tuition fees.
The official clarified that for other products, such as money back, the withdrawal at the time of maturity will be taxed, if the annual premium paid is more than 5% of the total sum assured under the policy. There will be no tax, however, when the annual premium is less than 5% of the sum assured. This is to ensure that investment products do not escape taxes by bundling in token insurance cover.