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Insurance: Pay 3% or 1.5% Service Tax Now


Till last year, service tax was chargeable on the premium you paid for Term insurance policies. Even in ULIPs the service tax was only charged on the portion related to “mortality charges”, if it was indicated in the policy. For money-back, endowment or other “traditional” policies, no service tax was charged.

(The official excuse: Since you’re investing and getting back money, you don’t pay service tax. But insurance is not considered an investment asset, according to the Income Tax act. It is an expense to buy it, and an income when you get money from it. Some of this money is exempt from taxes, but as we are finding out, tax law changes will change these exemptions to our detriment.)

In Budget 2012, Service Tax of 3% will apply to the first year’s premium of any non-term policy, and 1.5% to subsequent year’s premium. 

This will apply to all policies, including past policies, it seems. I cannot see anywhere that it disqualifies those policies but I’ve made mistakes before. (Please let me know if you notice!)

References: Memorandum 2 (See note 3 under “SERVICE TAX”) and Service Tax Notification 03/12 [ search for sub-rule (7A) ]


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