The Insurance Regulatory and Development Authority (Irda) will approach the Central Board of Direct Taxes (CBDT) to get a tax exemption for the 10 per cent surcharge levied on fire and engineering insurance covers effective October 1.
In a meeting on Thursday with the Tariff Advisory Committee (TAC), it has been proposed that the additional premium collected in the form of surcharge ought not to attract corporate tax at the rate of 40 per cent.
The 10 per cent surcharge levied will initially apply to fire and engineering risks, though sources in the industry said that it could be extended to other tariff items including motor.
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Based on the present premium collection of around Rs 10,000 crore of the four state insurers, and the fact that collection will be on a pro-rata basis, the sum would be about Rs 300 crore.
"The accounting procedure has to be addressed by the CBDT provided that the fund is kept separate only to meet contingencies and claims arising out of terrorist and war attacks," said officials at a public sector insurance company.
Premium collected by insurers is subject to income tax, and in order to build up a reserve fund for individual insurers, it has been decided that a tax exemption is necessary.
In the past similar funds had been constituted at the initiative of the central government during the Bangladesh and Pakistan wars. At the time, the government had asked the four state-owned insurance companies to help collect and administer the war insurance, which was then credited to the government fund.
While New India Assurance looked after the western region, Oriental Insurance Company looked after collection in northern India, National Insurance Company administered collections from the east and United India Insurance took care of the south. Collections were taken at flat rates at that point in time.