Investor’s Reform in 2009 (# 3) - Cap on ULIP Charges by IRDA

Photo by Mutasim Billah Pritam

This post is a thorough review of IRDA circular putting a cap on ULIP charges. I’ve divided the post into three parts for ease of reading:

Part 1: Highlights of the IRDA circular capping ULIP expenses

Part 2: Impact on Investor’s, Insurance Agents and Life Insurance Industry

Part3: My opinion

The year 2009 has potential to become watershed in the history of investor’s reforms if the pace of financial reforms continues.

Of late, financial regulators have started taking their job seriously and thinking with a focus on customer benefit rather than working under pressure from various industry lobbies. Perhaps, taking a cue from SEBI, IRDA also wants to come out of the undue influence of insurance industry and work for the benefit of customers / investors.

The much anticipated and long over-due reform in the life insurance industry is a step in the right direction, though it has left many questions unanswered.

Currently, various ULIP charges such as mortality charges, premium allocation charges, administration charges and fund management fees are recovered from the policy holder, but there is no maximum limit imposed. To know more about the charges, click here.

To ensure that ULIP charges are reasonable, IRDA has issued a circular (No: 20/IRDA/Act/ULIP/09-10) dated 22 July, 2009 to all life insurance companies capping overall ULIP charges but leaving various individual charges at the discretion of insurers.


Highlights of the IRDA Circular Capping ULIP Charges:
Here are the major points of the IRDA circular dated July 22, 2009 capping ULIP expenses:

1. Effective Date:
New ULIP Products --> October 1, 2009
Existing ULIP Products --> December 31, 2009


2. Maximum Cap on ULIP Expenses:
IRDA has defined the overall cap on charges in terms of difference between gross yield and net yield which is nothing but ‘expense ratio’ or ‘reduction-in-yield’.

For the purpose of maximum limit on expenses, IRDA has classified ULIPs in two parts based on the tenure. Besides, total cap on expenses, it has also put a sub-limit on fund management charges (FMC).

i). ULIPs having tenure of up to 10 years: the difference between gross and net yield can’t exceed 3 per cent (300 basis points) of which FMC can’t exceed 1.5 per cent (150 basis points). Put simply, the overall charges are capped at 3% and the fund management charges (FMC) not to exceed 1.5 per cent.

ii). ULIPs with tenure of more than 10 years: Overall ceiling is 2.25% of which FMC shall not exceed 1.25%


3. Exclusions from Cap:
However, certain charges / expenses have been excluded from the ceiling. Put simply, insurance companies can recover the following charges in addition to maximum allowed limits of 3 per cent / 2.25 per cent mentioned above:

a). Extra mortality premium charged from policyholder due to poor health.
b). Cost of all rider benefits such as accident & disability benefit rider, waiver of premium rider, critical-illness rider and income benefit rider.
c). Service tax on all charges.
d). Explicit cost of investment guarantee. In other words, guaranteed Ulips are allowed to charge extra for providing capital guarantee / NAV guarantee.


4. Certificate:
In addition to putting a cap on the maximum limit, IRDA has also made it mandatory for all insurers to issue a certificate at the time of ULIP maturity showing year-wise premiums paid, charges levied, fund values, actual gross yield and net yield.


Impact of the IRDA Circular Capping ULIP Charges:

1. Impact on Insurance Agents
Reduced commission for insurance agents. But reduction is not going to be significant and won’t stop mis-selling of ULIPs.


2. Impact on Customers / Investors
i). Policyholders can expect higher return on investments in ULIPs due to reduced costs.

ii). Investors will be encouraged to go for longer term ULIPs.

iii). The flip side is that there is every possibility of reduced insurance cover and short term ULIPs.

Anyhow, let’s make an attempt to quantify the actual impact of the reduction in costs / increase in ULIP returns due to capping of charges. The only reliable way to measure the impact in terms of difference between present expense ratio and the maximum expense ratio to be allowed in future is to use the ULIP rankings done by OUTLOOK MONEY in December 2008.

A total of 32 Type I Ulips and 10 Type II Ulips were ranked assuming 10 per cent rate of return (Gross Yield). The comparison was for a 15 year ULIP with a sum assured of Rs 5 lakh and annual premium of Rs 50,000 purchased by a 35 year old male.

Out of 32 Type I ULIPs, the best one has a ‘net yield’ (also called IRR) of 8.07 per cent and the last one has an IRR of 6.09 per cent. Leaving aside the top 3 ULIPs, all others have “expense ratio” or “reduction in yield” which is exceeding the maximum limit of 2.25% by a margin in the range of .06% to 1.66%.

Besides, all the 10 ULIPs under Type II have expense ratio / reduction-in-yield exceeding the maximum limit by a margin ranging from 0.20% to 1.62%.

But, how much difference does it make in the maturity value of an ULIP? Let’s see with the help of an example. Suppose, you’re investing Rs 50,000 every year for 15 years in a ULIP which is currently having an ‘expense ratio’ of 3.50% (IRR of 6.50%) against the maximum allowed 2.25% based on assumed Gross Yield of 10%.

a. Maturity value at 10% CAGR (Gross Yield) --------------> Rs 17,47,486

b. Maturity Value at 7.75% CAGR (Minimum Net Yield) -> Rs 14,34,668

c. Maturity Value at 6.50% CAGR (Current Net Yield) ---> Rs 12,87,700

d. Maximum allowed expenses (a-b) --------------------------> Rs 3,12,818

e. Impact on Returns / reduction in expenses (b-c) ---------> Rs 1,46,968

Please note that the amount of expenses allowed will keep on varying with the change in gross yield. Suppose that in the above example ULIP is able to generate actual gross yield of 12%, then the maximum allowed expenses will be Rs 3,78,330 (minimum ‘net yield’ for investor to be 9.75%) and if the actual gross yield falls to 4%, then the maximum charges to the extent of Rs. 1,77,143 can be recovered.


3. Impact on Insurance Industry
This significant move from IRDA is expected to have far reaching consequences on the way life insurance industry works. It should rein in the excesses of life insurance industry, put some semblance of order in the way life insurance industry works and check the mis-selling of ULIPs.

Let’s wait and watch whether life insurance industry actually put their house in order and control the expenses or find some innovative ways to bypass the IRDA ruling.

Following is the list of immediate fall out of the IRDA circular capping ULIP charges on the life insurance industry:

i). We can expect some kind of level playing field between life insurance industry and mutual fund industry.

Due to abolishment of entry load in mutual funds, the gap between the commission structure of mutual funds and life insurance policies widened too much and hence the ULIPS were expected to have an undue edge over their mutual fund counterparts. Now, to some extent, this concern will be taken care of.

ii). It should result in more focus towards protection oriented policies (which is the real essence of life insurance industry) rather than just fund management business. However, it seems doubtful.

iii). From the point of view of insurer’s, short term ULIPs (with a duration of up to 10 years) are going to more profitable.

Although customer will prefer buying longer term ULIPs ; however, it is quite probable that insurance companies will hesitate is selling long term ULIP plans and give more push to shorter term policies.

iv). Insurance companies are caught in a catch-22 situation, due to inclusion of mortality charges in the over-all cap. A mortality charge depends on ‘sum-at-risk’ (SAR) which varies with the sum assured and age of the insured. Either it can lead to cross-subsidization or affect the profitability of the insurance companies adversely.

However, there is third possibility (reducing life coverage) also and in all likelihood insurers will go for it. Put another way, it is quite possible that instead of controlling other expenses such as allocation charges and administration charges insurers will start restricting or reducing the level of maximum sum assured to remain within the maximum limit imposed on the charges. As a result, whatever meager life cover the ULIPs currently offer will get reduced further and it will become more of a pure investment product.

In a similar vein, life insurance companies will prefer to issue Type I ULIPs over Type II because of higher mortality charges in the latter.

Furthermore, debt funds will have an edge over equity funds as there is no distinction between debt and equity funds for the purpose of cap on expenses. As you must be aware that FMC of debt funds is lower (almost half in case of pure debt funds) than equity funds, so an ULIP with only debt fund option or majority of debt funds would have more leeway in recovering higher other charges.



My Opinion:
First, Mortality charges should be excluded from the overall cap and accordingly the cap on overall charges should also be revised downwards, so that finally there are two different caps, one for the FMC and other one for the other charges such as allocation charges, administration charges and other miscellaneous charges (mortality charge to be added in the exclusion list).

Alternatively, remove the mortality charges from the cap and also remove the sub-cap on FMC so that there is only one cap for all expenses except mortality (in addition to the exclusions already mentioned).

Second, manner of calculation of gross yield (the actual returns generated by the ULIP) has not been defined. At the time of sale, ‘benefit illustration’ will be based on assumed gross yield of 10%. But, you would have to wait till the expiry of your policy to know the actual gross yield. As per the circular, insurers are going to show you the actual yield only at the time of maturity of ULIP. And how they are going to calculate it has been left entirely at their discretion. Why not show the cumulative gross yield & expense ratio’s every year? This disclosure is very essential to bring in more transparency.

Third, to avoid any confusion and mis-interpretation it should be specifically mentioned that the ‘gross yield’ is to be based on premium paid (i.e., premium allocation charges are also part of the overall cap).

Fourth, put a blanket ban on issuance of Ulips with less than 10 years duration.

But my worry is that instead of taking the above steps, IRDA might dilute the effect of circular before its implementation date due to pressure from insurance lobby.

Anyhow, still this is not enough and won’t stop life insurance industry from making fool of people.

In my view, ultimately the simple & best way to regulate life insurance industry is to separate investment from insurance which can be done if our finance minister becomes wise enough to abolish all kind of tax incentives on life insurance policies except pure term plans. Rest everything will follow.

The need of the hour is provide affordable & real life insurance to the masses and the solution is very simple enough. Any takers??

What do you feel about it? Do you agree or do you have any other opinion regarding capping of ULIP charges or the working of life insurance industry? Please feel free to air your views by writing in the comment box.

UPDATE: To know the details of revision made by IRDA in the original circular capping ULIP charges, see: Revised Cap on ULIP Charges - What a Sham!

Also see:

1. Investor’s Reforms (#1) - What’s new in 2009?
2. Is it Complexity or Confusopoly?
3. 5 Secret Tips about ULIPs
4. Best ULIPs based on IRR
5. OUTLOOK MONEY: Type-I ULIP Rankings
6. OUTLOOK MONEY: Type-2 ULIP Rankings

ULIPs: Top 10 FAQs

Photo by Oberazzi

While making decisions about money matters, it is always better to be informed instead of relying on hearsay and rumours or making wild guesses.

Unit-linked Insurance Plans (Ulips) which combine the features of mutual funds with life insurance are considered as the most complex financial products available in the market. This post makes an attempt to demystify various features of Ulips. Here’s a list of top ten FAQs about Ulips:


ULIP FAQs:

FAQ-1: What are ULIPS?
Unit-linked insurance plans, popularly known as Ulips are life insurance policies which offer a mix of investment and insurance similar to traditional life insurance policies such as endowment, money-back and whole-life, but with one major difference. Unlike traditional policies, in Ulips investment risk lies with the insured (i.e., policy holder) and not with the insurance company. Put another way, in case of adverse market conditions, you can even lose your capital invested.


FAQ- 2: What are the other differences between Ulips and traditional insurance plans such as endowment and whole life? Which is better between the two?
In addition to the risk factor, comparison can be made between the Ulips and traditional Insurance Plans based on various parameters such as returns, transparency, flexibility and liquidity. Read more.


FAQ-3: What are the different types of Ulips?
Broadly, there are two kinds of Ulips - Life insurance Ulips & Pension Ulips. Here we are discussing only life insurance Ulips.

Further life insurance Ulips can be categorized into two types: Type 1 & Type II Ulips. Type II Ulips which offers both the sum assured and fund value in case of death are certainly better than Type I Ulips. Read more.

Besides, there’s another way to classify Ulips: Guranteed Ulips and normal / Plain-Vanilla Ulips. To know more about guaranteed Ulips, see the review of SBI Life - SMART ULIP.


FAQ-4: What are the various fund options available in Ulips?
The biggest misconception about Ulips is that they are entirely linked to equity markets. The fact is that, within an Ulip policy various fund options exist with varying exposure to equity and debt such as 100% equity fund, 100% debt fund, and balanced fund. Most ULIPs available in the market usually offer you a choice of 5 to 7 funds.

You’ve to choose the most suitable fund option according to your needs and risk profile. Thus, if you’re risk averse investor, option to invest your entire premium (net of charges) in a debt fund is also there.


FAQ-5: What is a fund switching facility in Ulips? How many fund switches are allowed in a year?
Ulips certainly score over mutual funds when it comes to fund switching.

After initially choosing a fund or funds at the time of buying a ULIP, you’re further allowed to switch / shift between different fund options any number of times you wish. However, there is a cap on the maximum numbers of fund switches allowed during a year free of cost. Beyond that, the policy holder has to pay a flat charge per switch.

This is one of the closely guarded secrets of Ulips and is to be used over and over again. However, remember that it can also backfire if you are not careful because frequent switching amounts to timing the markets.


FAQ-6: What are various costs of Ulips?
In Ulips expenses do matter and can make a big difference in the IRR of the policy.

Here’s a list of various charges:

1. Allocation charges: Also called premium allocation charge (PAC), it is deducted from the premiums paid to cover the marketing and distribution costs (including agents commission) of ULIPs. Usually in the initial 2-3 years, allocation charges are on the higher side (called front-loading) of charges. From 3rd or 4th year onwards, premium allocation is reduced to 2% - 5% in most of the Ulips.

2. Administration charges: These charges are deducted monthly on flat basis to meet the general administration and management costs of ULIPs. However, Some Ulips charge policy administration charge as a percentage of the annual premium amount (e.g. 2% of the annual premium) but adjust it from the fund value each month.

3. Mortality charges: This is the cost of life insurance cover provided to the insured. Mortality charge is a variable charge levied on monthly basis and depends on mortality rate (which depends on your age, gender and health) and sum at risk (SAR = Sum assured minus fund value in case of type I Ulips). For Type I Ulips, as the fund value keeps on increasing, ‘sum at risk’ decreases and consequently mortality charges also decreases.

4. Fund Management charges: This is a fee charged (as a percentage of funds under management) for managing your investments. It usually ranges from 0.5% to 2% depending on the insurer and the type of fund and is deducted before arriving at the NAV. In other words, NAV figures published by insurers are after deducting the fund management charges from the gross returns earned by the fund. In a sense, it is an invisible cost and you won’t even feel it. Besides, it’s impact also increases with the rise in the fund value as it is levied on percentage basis on the fund value. However, FMC charges are usually lower in Ulips as compared to mutual funds.

Allocation charges are fixed, front-ended and deducted from the premium and net premium is invested. Mortality charges are variable in nature and are usually deducted on monthly basis by cancellation of the units. Similarly, administration charges which may be levied either on flat or variable basis are deducted on monthly basis by cancellation of the Units. Finally, FMC charges, as already mentioned, are also variable and automatically adjusted /deducted from the NAV.

Besides, there are certain other miscellaneous charges such as surrender charges (levied in case of premature exit), fund switching charges (in case of number of switches exceeds the free switches allowed in a year) and top up charges.


FAQ-7: What are Top-ups? Whether top-ups are also eligible for section 80C tax benefit?
The additional investments––over and above the regular premium––you’re allowed to make in Ulips are called top-ups.

Yes, of course, for the purpose of tax deduction under section 80C of the Income Tax Act, there’s no difference between regular premium and a Top-up premium.

In fact, Top-Ups are another hidden secret about Ulips. Read more.


FAQ-8: How to compare / evaluate various Ulips?
Comparison between various Ulips can be made based on two broad parameters. First is cost or internal rate of return (IRR) and second criteria is the fund performance as depicted by actual gross returns (growth in NAV over a period of time) being generated by various funds of Ulips. Finally, the best ULIP is one with the lowest cost structure and highest relative returns.

However, while making comparison we’ve to ensure apple-to- apple comparison. Put simply, Type I Ulips have to be compared with other Type-I Ulips only and not Type II Ulips. Furthermore, while comparing two Ulips, fund options also need to be similar. An equity fund option of, say, Type II Ulip can’t be compared with debt fund option of another Type ULIP II ULIP.

To know the ranking of Ulips based on IRR, go to Best Ulips based on IRR.


FAQ-9: Are Ulips better than Term Plans?
No, absolutely not! Term insurance plans are better than Ulips. If you truly understand the meaning of life insurance, then there’s nothing compared to term plans.

Though it may seem counterintuitive, in my view, term plans should be the only product sold by Life Insurance Industry. However, in reality, term plans are least sold life insurance policies in India.

Just imagine a car showroom selling you every kind of vehicle other than the car (such as SUVs, Trucks and Tractors) and only after your repeated requests and pleading the salesman reluctantly agrees to show you the car.


FAQ-10: Can Ulips be surrendered and what are the implications?
Yes, it is very much possible to make a premature exit from Ulips. However, there are certain tax and cost considerations to be kept in mind before moving out. For more details, check out: How to Surrender or Get rid of Life Insurance Policy.


Do you've any other question or opinion regarding ULIPs? Feel free to leave it in the comment box.


Also see:

1. 5 Top Misconceptions about Life Insurance

2. Understanding Life Insurance – Ask Yourself a Few Questions

3. Most Amazing Fact about Life Insurance

4. Is it Complexity or Confusopoly?

5. Capping of ULIP Charges by IRDA - A Review

Income Tax Calculator: FY 2009-10 (AY 2010-11)

Photo by Phillip

Budget 2009-10 has revised the basic income tax exemption limit and abolished the surcharge for individual tax payers. See the post Income Tax Rates and Slabs FY 2009-10 for the new tax brackets / rates applicable to individuals for the previous year (PY) / financial year (FY) 2009-10 and assessment year (AY) 2010-11.

Due to the aforesaid changes, the Income Tax Calculator is also updated / revised for computing income tax liability for the current financial year (FY) 2009-10 / assessment year (AY) 2010-11. Here’s the new Tax Calculator for PY/FY 2009-10 & AY 2010-11:

INCOME TAX CALCULATOR (FY 2009-10 & AY 2010-11)




Notes / Instructions for Using Tax Calculator:

1.The calculator is meant only for tax calculations of resident individuals. In other words, it is not applicable for non-residents.

2. It is presumed that there is no agricultural income.

3. This calculator is meant to calculate tax provided you know your GTI (i.e. Gross Total Income). GTI includes all your taxable income under various heads of income (Salary, House Property, Income from Business & Profession, Capital gains and Income from other sources) after excluding all your exempt income (i.e. income which is not taxable) and also after set off and carry forward of losses of current year & earlier assessment years.

4. Please note that LTCG on equity shares or equity oriented mutual funds on which securities transaction tax has been paid are exempt from tax u/s 10(38) and therefore doesn't form part of long term capital gains (LTCG). So, ensure that you exclude it from GTI also.

5. Please also note down that "Incomes subject to special rates of tax" is to be included under GTI and also to be mentioned separately under the relevant column in the tax calculator.

6. In the “Tax Payer Status” column, please enter 1 for senior citizens [i.e., if you’re an individual (man / women) above 65 years at any time during the year 2009 – 10 (Apr 2009 – Mar 2010)], 2 for Women and 3 for other individuals.


If you want to calculate your tax liability for the FY / PY 2008-09 (AY 2009-10), check out: Income Tax Calculator FY 2008-09 (AY 2010-11).


Also see:

1. Budget 2009-10 Tax Proposals: Impact on Individuals
2. Income Tax Calculator FY 2008-09 (AY 2009-10)
3. How to Calculate Your Taxable Income
4. How to Calculate Your Tax Liability
5. Amazing Facts about Tax Rates

6. PPF Returns Calculator
7. 12 Tips for Filing Tax Returns

Income Tax Rates / Slabs: FY 2009-10 (AY 2010-11)

Photo by Jeremy Brooks

Union Budget 2009 has revised the basic income tax exemption limit and abolished the surcharge for individuals. The threshold for non-taxable income has been increased from Rs 2.25 lakh to Rs 2.40 lakh (a hike of Rs 15,000) for senior citizens, from Rs 1.80 lakh to Rs 1.90 lakh (increase of Rs 10,000) in case of resident women and from Rs 1.50 to Rs 1.60 lakh in case of other individuals. However, there is no change in income tax rates.

Further, surcharge of 10% levied on taxable income exceeding Rs 10 lakh is abolished but education cess of 3% is retained.

The new / revised tax slabs / rates applicable to individual tax payers for the financial year (FY) 2009-10 and assessment year (AY) 2010-11 are as follows:

Latest / Revised Income Tax Slabs / Rates for FY 2009-10

New IT Slabs/ Rates for Resident Senior Citizens (FY 2009-10):

Up to Rs 2,40,000-----------------> No tax / exempt
2,40,001 to 3,00,000-------------> 10%
3,00,001 to 5,00,00---------------> 20%
Above 5,00,000--------------------> 30%


New IT Slabs / Rates for Resident Women (below the age of 65 years) (FY 2009-10)

Up to Rs 1,90,000-----------------> No tax / exempt
1,90,001 to 3,00,000-------------> 10%
3,00,001 to 5,00,00---------------> 20%
Above 5,00,000-------------------> 30%


New IT Slabs / Rates for Other Individuals (FY 2009-10):

Up to Rs 1,60,000 ------------------> No tax / exempt
1,60,001 to 3,00,000---------------> 10%
3,00,001 to 5,00,00----------------> 20%
Above 5,00,000---------------------> 30%


If you’re confused between financial year (FY) / previous year (PY) and assessment year (AY), check out: 3 Other Sources of Tax Confusion.

And, if you would like to know the highlights or the detailed tax proposals of budget 2009-10 regarding individual tax payers and their impact on you, see Budget 2009-10 Tax Proposals: Impact on Individuals.

UPDATE (27 Feb'10): For latest IT rates / slabs for FY 2010-11 as per budget 2010, click here.

Also see:

1. Budget 2009-10 Tax Proposals: Impact on Individuals
2. Income Tax Calculator FY 2008-09 (AY 2009-10)

3. Income Tax Calculator FY 2009-10 (AY 2010-11)
4. How to Calculate Your Taxable Income
5. How to Calculate Your Tax Liability
6. Amazing Facts about Tax Rates
7. 12 Tips for Filing Tax Returns

8. ULIP Charges Capped - Impact on Investors

Budget 2009-10 Highlights - Tax Proposals Impacting Individuals

Union budget 2009-2010 was tabled by the Finance Minister Mr. Pranab Mukherjee in the parliament on July 6, 2009. This post gives you a detailed review of the budget proposals relating to income tax affecting the individual tax-payers.

Changes in Tax Slabs / Rates

1. Income Tax Slabs: Basic exemption limit raised
The budget has hiked the basic income tax exemption limit marginally by Rs 10,000 for women tax payers (from 1.80 lakh to 1.90 lakh), Rs 15,000 for senior citizens (from 2.25 lakh to 2.40 lakh) and by Rs 10,000 for other individuals (from 1.5 lakh to 1.6 lakh).

This is not significant as it will result in a reduction in tax liability by just Rs 1,545 in the hands of senior citizens, and by Rs 1,030 for women and all other individual assesses.

2. Surcharge on Income Tax: Abolished
The Union Budget 2009-10 also proposes to do away with the 10% surcharge on personal income tax. From the point of view of individual tax payers, this is the most prominent feature of the budget 2009-10 as the impact on the tax liability of individual assesses with taxable income above Rs 10 lakh is quite significant. For individuals having taxable income in excess of Rs 10 lakh, there is going to be substantial tax savings as the effective maximum marginal tax rate comes down from 33.99% to 30.90%.

For instance, for a male individual with a taxable income of Rs 15 lakh, total effective tax savings works out to be Rs 37,595. His new tax liability would be Rs 3,64,620 instead of Rs 4,02,215 earlier. Similarly for women assesses having taxable income of Rs 15 lakh, effective annual tax savings comes to Rs 37,286 and for senior citizens having taxable income of Rs 15 lakh the total reduction in annual income tax liability would be Rs 37,338.

3.Wealth Tax : Exemption limit enhanced
The budget 2009-10 has also increased the threshold limit for payment of wealth tax from existing 15 lakh to Rs 30 lakh. In other words, wealth tax is now payable on taxable wealth over Rs 30 lakh instead of Rs 15 lakh.

This is applicable from AY 2010-11 which means that you would have to pay wealth tax for the AY 2010-11 only if your ‘net wealth’ as on 31st March 2010 is in excess of Rs 30 lakh.

This will result in tax savings of Rs 15,000 for those having taxable wealth in excess of Rs 30 lakh. And, for those having ‘net wealth’ between 15 -30 lakh, the entire tax amount would be saved.


Section 80 Deductions

1.Loans for higher education: Scope enlarged
Scope of deduction under section 80E stands enlarged. Earlier deduction u/s 80E on account of interest on loan taken was allowed only for pursuing certain specified fields of study, but now the extended scope would cover almost all fields of studies including vocational studies pursued after completion of schooling.

At present, deduction u/s 80E is available for pursuing only full time graduate and post-graduate courses in engineering, management, medicine or post-graduate course in applied sciences or pure sciences including mathematics and statistics.

The Finance Bill 2009, proposes to introduce a new definition of higher education with effect from April 1, 2010. According to new definition, “higher education” means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university duly recognized by Central Government, State Government, local authority or any other authorized authority.

Thus, now it covers the entire gamut of higher education.

2. Medical treatment / maintenance of handicapped dependants: Limit increased
Deduction under section 80DD for medical treatment / maintenance of handicapped dependent with ‘severe disability’ is proposed to be raised from present Rs 75,000 to Rs 1 lakh. Please note that limit for ordinary disability (i.e., disability which is not severe) remains same at Rs 50,000.

3. New Pension Scheme: Tax benefit extended to self-employed
At present, the benefit under section 80CCD for contributing to New Pension Scheme (NPS) is available to “employees” only. However, since the NPS schemes covers self-employed persons also with effect from May 1, 2009, it was necessary to amend section 80CCD to include self-employed.

Thus, section 80CCD is also sought to be amended by the budget 2009 to enable self employed persons to participate in the NPS and avail the tax deduction available thereto.


Taxation of Gifts

Non-monetary gifts: Exemption withdrawn
At present, cash gifts from non-relatives received (other than on the occasion of marriage, or by will / inheritance etc) are exempt up to a limit of Rs 50,000 per year. And if the aggregate sum of all cash gifts exceeds Rs 50,000, then the entire amount becomes taxable in the hands of recipient. Furthermore, as of now, gifts in kind are completely exempted from income tax irrespective of the value.

But, now Finance bill 2009 proposes to amend section 56 of IT Act to include transfer of property without consideration or inadequate consideration under the ambit of taxation. Put another way, while the limit of Rs 50,000 is retained, non-cash gifts are brought in the tax net. Thus, evasion of income tax through gifts-in-kind is no longer possible.

Effective from October 1, 2009 every gift of immovable property or movable property (shares and securities, jewellery, archaeological collection, or works of art such as paintings and sculptures) from non-relatives is taxable in the hands of recipient / donee if the value of gift exceeds Rs 50,000.

However, similar to cash gifts, non-monetary gifts also exempted if received on the occasion of marriage, or by will / inheritance etc.

Furthermore, please note that the limit of Rs 50,000 for gift of immovable property and another one of Rs 50,000 for movable property are in addition to the existing limit of Rs 50,000 for monetary gifts. So, now there are three separate limits for the purpose of taxation / exemption of gifts.


Taxation of Fringe Benefits & Perks

1. FBT Abolished
The Fringe Benefit Tax (FBT) on the value of certain fringe benefits provided by employers to employees introduced by Finance Act 2005, is proposed to be scrapped with effect from AY 2010-11.

It’s a major relief to employer's as it was really causing a lot of confusion and hardship to them regarding the taxation of employee benefits.

2. Perks: To be taxed in the hands of employees
Along with the abolishing of Fringe Benefit Tax (FBT), the budget 2009 proposes to restore the taxation of fringe benefits as perks in the hands of the employees. So with the shifting of tax burden on fringe benefits back to the employees, they will have to pay tax on perquisites such as Employee Stock Option Plans (Esops), employers’ contribution to superannuation funds and other perquisites to be specified in due course. Put simply, benefits presently liable to FBT will be taxed as perks in the hands of employees.

The Finance bill 2009 proposes to amend clause (2) of section 17 of the Income Tax Act, 1961 to include the value of Esops / sweat equity shares allotted or transferred, directly or indirectly by the employer or former employer free of cost or at concessional rate to the employee. Further, employers’ contribution to any approved superannuation fund in excess of Rs 1 lakh per annum will also be treated as perquisites.

Finally, the value of taxable perks shall also include any other amenity to be notified in due course. So, now benefits such as gift vouchers, free meals, cars, credit cards, club expenses etc provided to employees will again become part of taxable income of employees. Ultimately, the tax saved due to abolition of surcharge will get nullified by the taxation of perks in the hands of individual assesses.


Others direct tax proposals

1. Filing of Tax Returns: To be Simplified
To simplify the filing of tax returns, SARAL 2 income tax forms to be reintroduced at the earliest.

2. Taxation of NPS: Status Quo Maintained
There is no change in current status of New Pension Scheme (NPS). It will continue to be subjected to “exempt-exempt-taxed” EET method of tax treatment of savings. In other words, unlike PPF, EPF or NSC you will have pay tax at the time of withdrawal from NPS. Sorry, PFRDA could not succeed in wooing the Finance Minister.

3. Deposit of Advance Tax: Limit Enhanced
Threshold limit for payment of advance tax as per section 208 of IT Act raised from the present Rs 5,000 to Rs 10,000.

It is effective from 1st April, 2009. Thus, you would have to pay advance tax for the financial year 2009-10 only if your tax liability exceeds Rs 10,000.


Also see:

1. Section 80C Tax Saving Options
2. Beyond Section 80C – Other Deductions U/S 80
3. Tax Calculator FY 2008-09 (AY 2009-10)
4. Tax Calculator FY 2009-10 (AY 2010-11)
5. Investors Reforms in 2009
6. Health Mediclaim Insurance – Latest IRDA Circulars
7. Capping of ULIP Charges - Impact on Investors

Investor’s Reforms - What’s New in 2009? (# 2)

Photo by 917press

This post is # 2 of two part series on investor’s reforms introduced in first half of 2009. The part I Investor’s Reform – What’s new in 2009? talked about recent changes introduced by RBI, SEBI & PFRDA for the benefit of common investor. This post lists latest guidelines / circular issued by IRDA in 2009 relating to health mediclaim insurance policies.

Health / Mediclaim Insurance Policy – Latest IRDA Guidelines

1. Renewal of Health / Mediclaim policies
IRDA has finally woken up to the harassment of consumers by the general insurance companies.

In the current scenario, buyers of health mediclaim policies are totally at the mercy of insurers while renewing the mediclaim policies. At the slightest of excuse they increase the premiums, don’t provide any grace period for paying premium, refuse to renew on arbitrary grounds or just because you made a claim in the previous year.

Now for all health policies issued or renewed on or after June 1, 2009, this is going to change for the better. IRDA has issued some guidelines (Circular no 52/15/IRDA/Health/SN/08-09 dated March 31, 2009) in the consumer interest to bring in more transparency and certainty regarding coverage and cost of health insurance.

First, at the time of buying the policy you’ll know in advance future premiums, specific circumstances under which premium could be loaded or discount withdrawn and extent to which it would be done. All insurers will have to provide detailed upfront disclosure.

Second, at the time of renewal you can expect that continuity of your policy won’t be affected just because of delay of few days in renewing the policy provided you renew your policy with in 15 days of the due date.

Third, in case of increase in premium (which shall be IRDA approved) from that mentioned in the policy, you will receive advance notice of at least 3 months before the renewal date informing you of the changes.

Fourth, now insurance companies won’t be able to deny the renewal of your health policy on arbitrary grounds or the ground that you made a claim (or claims) in previous year.

2. Health Insurance for Senior Citizens
There’s something more for senior citizens. In yet another circular (CIR/011/3/IRDA/Health/SN/09-10 dated 25th May 2009), IRDA has instructed all general insurance companies to allow entry at least up to 65 years of age. Further, if they deny insurance cover to any senior citizen, it will be done in writing with reasons for the denial. And, above all, premium charged on senior citizens health policies should be fair and transparent and loading, if any, should be disclosed to the insured.

In order to bring in more transparency, IRDA has also made it mandatory for all insurers to display detailed features / description including policy clauses of all health insurance products on their websites.

Thus, now with effect from July 1, 2009, no insurance company can refuse health cover to senior citizens till the age of 65, or charge exorbitant premium to discourage them from buying health cover. And, if they still dare to refuse, reasons will have to be recorded in writing (i.e., verbal refusal won’t be enough).

Also see:

1. 10 Practical Tips for Buying Health Mediclaim Policy
2. Health Mediclaim Insurance – Need for Timely Renewal
3. Health Mediclaim Insurance – Coverage & Exclusions

4. Budget 2009-10: Review of Tax Impact on Individuals
5. Investors Reforms in 2009 by RBI, SEBI & PFRDA

6. Capping of ULIP Charges by IRDA - A Review