From October, LIC policies will cost more. Life Insurance Corporation, which accounts for 83 per cent of the market share, will levy service tax of around 3 per cent on all non-unit-linked products beginning October 1.
This means if the annual premium for your money-back policy from LIC is Rs 10 lakh, you will have to pay an additional Rs 30,000.
While private insurers add a service tax component to the premium paid by customers, LIC has not been levying the tax on its popular endowment and money-back plans.
From October, however, all LIC policies will attract a separate service tax, says a senior company official. LIC collected Rs 1,87,000 crore as premiums towards its non-unit linked polices in 2011-12.
In a recent announcement, insurance watchdog IRDA (Insurance Regulatory and Development Authority) mandated that service tax shall not be included in the contractual premium, but collected from policyholder separately.
Speaking to Business Line, a senior official from LIC said, “We will start charging service tax of about 3 per cent upfront to policyholders from October 1, as prescribed by the IRDA.
“We are currently absorbing the service tax as a part of the policyholder’s funds, as the share capital of the Government (which is our owner) is just around Rs 100 crore.”
He further explained that when service tax is charged separately, LIC may be able to pay higher bonuses on the policies.
All along LIC has been paying the service tax from the money in the policyholders’ account (which holds the premium collected and income from investments). It is the surplus in this account that is declared as bonus on traditional plans.
Customers may, however, see this move only as an additional burden.
A few LIC agents whom Business Line spoke to said the service tax was a deterrent particularly for immediate annuity plans and single premium products where the premium is usually large.
“LIC may lose the advantage over other traditional plans from private insurers now, and though this may come as a shock to customers initially, they will slowly get accustomed to the new normal”, said an LIC agent.