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Thanks to Budget 2004-05 you will have to set aside more towards your insurance premium. This is because the service tax has been hiked from 8 percent to 10 percent.
Wondering how it will affect you? Take a look.
Risk component of your premium: Your insurance premium consists of the risk component as well as the administration and sales expenses factored in. These expenses constitute a major component in the first year premium and comes down over the years. Now since the service tax will be imposed only on the risk component, those covers that are pure risk covers will have to bear a major brunt. Term covers are pure risk covers and the tax will be imposed on the entire premium amount.
Risk component lower in unit linked products: On the other hand unit linked products, being market related have a small component of risk and hence the hike will not be steep. Similarly there are savings products such as money back policies and endowment policies which have a small component of risk with the balance amount returned to the policyholder at stipulated intervals.
Risk premium varies with age:And risk premium varies on the basis of the age of the individual among other factors. Hence for insurance companies, implementing the hike will add to their cost not to mention the administrative hassles involved.
Why tax insurance? Insurance companies have together made up a case on how the hike in service tax imposed on insurance will in no way bring in any additional revenue to the Finance Minister. Instead they say that the tax could be imposed on other related aspects such as courier and printing which would bring in the desired revenue for the government.
Will FM rollback service tax on insurance: Besides imposing tax on insurance would only act as a discouragement to purchasing insurance especially in a country like India where insurance penetration levels are abysmally low. Though the industry hopes that the Finance Minister rollsback the service tax, industry experts feel that the chances are dim. All said, as of now the budget announcement prevails.