Assign limit for exempting tax under life cover: insurers

To promote long-term investment and increase penetration of life insurance cover in the country, the insurers today demanded that the government assign a distinct limit for tax exemption of these instruments and exempt annuity from tax in the Budget.

In the upcoming Budget to be presented on July 6, the new UPA government should consider "a separate limit for long term investments such as life insurance and annuity for income tax exemption", ICICI Prudential Life Insurance Executive Vice President Puneet Nanda told PTI.

"The definition of long-term investment could be any investment with an investment horizon of at least five years," Nanda said, adding that it would help in promoting savings behaviour.

Also, exemption of tax on annuities will be another way to provide incentives for long-term savings, as taxing the whole annuity payout, which is the current tax regime, leads to double taxation, he added.

Annuity is a contract sold by an insurance company designed to provide payment to the holder at specified intervals, usually after retirement.

Taxation of annuities leads to double taxation as part of principal investment is taxed again when it is received as an annuity, according to insurance players.

This acts as huge deterrent for purchase of annuities, they said adding only the investment income on the principal amount should be taxed and not the principal itself.

Insurance companies have also been demanding for limiting service tax on the unit linked investment products (ULIP) of life insurance company to only fund management charges.

According to them, service tax on entire range of charges on ULIP schemes would widen the disparity between these products and mutual fund schemes.

"The service tax should be levied only on Fund Management Charges only. All other charges should be exempt from service tax to promote investment behavior and bring level-playing field for various investment instruments," Max New York Life CEO and MD Rajesh Sud said.

Earlier, insurance regulator IRDA had also asked for bringing about level-playing field between unit linked investment products of life insurers and mutual fund schemes in terms of service tax in the Budget.

At present, service tax on mutual funds is levied on asset management expanses.