Finance minister Pranab Mukherjee has addressed a long-standing demand of the insurance sector by

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keeping service tax limited only to fund management charges of unit-linked insurance policies (Ulips).

This brings Ulips on par with mutual funds as far as service tax because earlier service tax was applicable on the entire premium amount.

Fund management charges are a percentage fee charged by the insurance firms from policyholders to manage the investible corpus.

The gross amount charged by the insurer from the policyholder for the service provided or to be provided shall be equal to the maximum amount fixed by the Insurance Regulatory and Development Authority (Irda) and as fund management charges for Ulips, according to the budget speech.

Rajesh Vishwanathan, chief financial officer, Bajaj Allianz, said now the service tax on Ulips would be brought on the level of the mutual fund industry The mutual fund industry is already exempt from such tax.

The recent cap on charges by Irda on Ulips has capped the fund management charges at not more than 1.35 per cent or 135 basis points (bps). “The budget envisages that either the limit of 135 bps or the amount actually charged whichever is higher would be chargeable to service tax,” said V Srinivasan, chief financial officer, Bharti Axa Life Insurance. The tax sop relieves the rest of the charges on Ulips such as allocation charges, which are akin to the exempted levies, such as entry and exit load in a mutual fund, from service tax. “This will add 40-50 basis points on consumer internal rate return (IRR) yields,” Srinivasan added.

For Ulips, service tax was earlier imposed on the entire amount that the insurer kept, including administration charges. The finance minister’s proposal to remove service tax on charges for Ulips except for fund management charges will bring down the service tax on buying Ulips by 50 per cent, insurance experts said.

Gaurang Shah, MD, Kotak Life Insurance, said the move would only benefit policyholders because the service tax outgo on Ulips would come down by 50 per cent.

(With inputs from Sneha Shah, Dipak Mondal &Kumar Shankar Roy in New Delhi)