Although the uncertainty over regulation of unit-linked insurance products (Ulips) has been settled, investors in these schemes are now faced with the possibility of getting taxed at the time of withdrawing funds and industry players will soon meet Finance Ministry officials to address the issue.
"Ulips are basically investment products and need to be taxed. The final view, however, will be taken at the time of the formulation of the code," Finance Ministry sources said.
However, life insurers feel that Ulips are not pure investment products and should not be taxed.
"We have maintained that Ulips are not pure investment products. We will approach the revenue department soon," Life Insurance Council Secretary General S B Mathur said.
The revised draft of the Direct Taxes Code (DTC) extended I-T exemption at the time of withdrawal to only pure life insurance products.
"Approved pure life insurance products and annuity schemes will also be subject to the EEE (exempt-exempt-exempt) method of taxation," the revised draft said.
This means that Ulips, hybrid investment-cum-insurance products that account for over 50 per cent of the total life insurance business in the country, are excluded from the EEE method. Policyholders, hence, will have to pay tax at the time of withdrawal, sources explained.
At present, there is no tax levied on Ulips returns, an equity and bond-linked insurance instrument.
It was, in fact, the mixed nature of Ulip schemes that led to a turf war between insurance watchdog Irda and market regulator Sebi over the issue of jurisdiction. The matter was settled by an ordinance issued late on Friday, which gave Irda the power to regulate Ulips.
As per the revised DTC, which will replace the 50-year-old Income Tax Act, only six specified instruments will qualify for EEE (exempt-exempt-exempt) taxation, including pure insurance products.
Under the EEE mode, tax exemption is provided at all the levels of the instrument -- at the time of investment, during accrual and at the time of withdrawal. The DTC is expected to become operational from next April.