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Service tax hike to hit your insurance policy

Insurance plans came under service tax some four years back, but back then it was only 1 per cent, which has since gone up to reach 3.50 per cent.

June 19, 2015 4:18 IST | India Infoline News Service
Your insurer may not have told you, but your insurance premium has just gone up following the the recent hike in service tax. With effect from June 1, the service tax rate has gone up to 3.50 per cent against the old rate of 3 per cent in case of traditional plan in the first year, which will then fall to 1.75 per cent in the subsequent years compared with the old rate 1.50 per cent.
 
In the case of a term insurance plan, the new tax rate will be 14 per cent compared with the old rate of 12.36 per cent, which would means a substantial outgo.
 
The service tax rates have gone up across several services from June 1 as per the announcement in the Union budget. The service tax rate, which was 12.36 per cent earlier, has now risen to 14 per cent, making several key services costlier for us. 

Accordingly if your mobile phone bill is Rs 1,000 which used to balloon to Rs 1,124 earlier after service tax will now go up to Rs 1,140 after the revision.
 
In the insurance sector, the service tax hike will directly impact the premium amount you pay for an insurance policy. So, it is better you do the math and work out the revised premium amount much ahead so that you can plan better and set aside or save for the premium accordingly.
 
The increase in service tax will also reduce the overall return in case of traditional insurance plans, which are a combination of insurance cover and savings. Some estimates show the annual returns of a traditional plan will now come down to below 6 per cent per annum. 

Insurance plans came under service tax some four years back, but back then it was only 1 per cent, which has since gone up to reach 3.50 per cent.
 
The service tax has been expanded to cover a whole host of charges, including insurance policy administration and allocation charges, mortality charge and fund management charges on Ulips by some private insurers.
 
Some insurers say the service tax hike will not impact the annual premium in the case of Ulips or unit-linked insurance plans, but it will result in lower units for Ulips as the tax will be adjusted by deducting the equivalent units from the account or by levying the same on the investment fund held on your behalf.

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