LIC’s Jeevan Sugam advertisement claims to give 80C tax benefit at entry, but curiously it is silent about the 10(10D) tax-free corpus at exit. At a time when insurers make bold claims about tax benefits, LIC is understating the tax benefit which can create suspicion in the minds of consumers LIC (Life Insurance Corporation of India) has launched a traditional single premium product, Jeevan Sugam. The death benefit is 10 times the single premium paid and hence it should qualify for Sections 80C and 10(10D) tax benefits at entry and exit, respectively. Tax savings is an important selling point for insurance products and insurers like to highlight it in advertisements even to the extent of mis-selling. Strangely, the Jeevan Sugam advertisement only highlights Section 80C tax benefit, but remains silent about 10(10D) tax-free corpus on maturity. What could be the reason? Till March 2012, LIC was mentioning “Income Tax benefits under Section 80C and 10(10D) as per prevailing tax laws” in the advertisement. Case in point is Jeevan Vriddhi which mentioned about it. When the Finance Bill, 2012, made it mandatory that the sum assured should be 10 times the annual premiums (the earlier limit was five times) for insurance policies to enjoy the tax benefits on contributions under Section 80C and on maturity under Section 10(10D), the LIC Jeevan Vriddhi advertisement stated “Full tax benefits available up to 31st March 2012” as its death benefit was five times the premium. So, keeping silent on tax-free corpus on maturity for Jeevan Sugam is intriguing as LIC could have handled it like Jeevan Vriddhi in case tax laws were to be changed in the Finance Bill, 2013. As there is no change to the regulation pertaining tax benefit in the Union Budget 2013 (except for those with disabilities) there is no reason for LIC to keep silent on the 10(10D) benefit. It will only make the consumer suspicious about whether they will indeed get tax-free corpus on maturity. We written to LIC to find out the reasoning, but there was no response till writing of this article. One call to an LIC official left us even more curious. After a short laugh, the person stated that they are not ready to part with the logic behind the move. On insistence, here is the clarification he gave: “10(10D) should be available, but LIC has stopped mentioning about it for the last few products. We don’t want to pitch the product for tax savings purpose as it should be purchased for insurance needs. Since it is a tax saving season, we are highlighting Sec 80C benefit.” Why even highlight 80C if the product is to be purchased for insurance needs and not tax savings purposes? Moreover, tax savings is guaranteed by the regulations and hence why shy away from it? According to one LIC agent, “The end result is that the very reason why people buy insurance products will lead to confusion about tax benefits on exit.” Even the LIC’s development officers seem to be in the dark. According to one of them, “LIC has stopping putting 10(10D) benefit for last few products, but we have not been told the reasons by the corporate office.” Another LIC agent feels that it is due to some sort of clarification from a tax consulting company that LIC has dropped 10(10D) in the advertisement. While this is mere speculation, the fact is that LIC being a de facto government organisation, can indeed seek clarification from the finance ministry and take a firm stand on tax benefits of the product.

There could be three possible speculations why LIC may not be advertising about 10(10D) tax benefits. Let’s take example of person aged 30 years with premium of Rs33759 + 3.09% service tax. The death benefit will be Rs3,37,590, but maturity sum assured is only Rs60,000.

It means that real return is 5.59% after 10 years
• If you are not healthy, your premium will be loaded and you may not even meet the requirement of death benefit of 10 times the premium; 10(10D) will not be applicable. E.g. class one extra for age 30 years in above example will be Rs846. Total premium payable = Rs33,759 + 846 + service tax. • LIC Jeevan Sugam does have death benefit as 10 times of the premium, but it is excluding the service tax. Could this be an issue as the total premium with service tax will be more than 10% of the death benefit? It is unlikely. E.g. Premium with service tax = Rs33,759 + Rs1,043.15 = Rs34,802.15. • The maturity sum assured in the product is different than death sum assured. While the death sum assured is 10 times the premium, the maturity sum assured is low. The wordings in the rules specify about premium up to 10% of the actual capital sum assured. Some interpret actual capital sum assured as maturity sum assured, which makes Jeevan Sugam ineligible for tax benefits. More likely, death benefit will be the capital sum assured and stamp duty of the policy is payable on it and not maturity sum assured. It may be a non-issue, but see comment section below for another interpretation. When the government issues tax-free bonds, it is clear that the interest paid on the bonds is taxfree. As a buyer you are assured that tax-free bonds indeed will never ask for taxation on the interest. The same clarity is there for PPF and EPF. Will insurance product buyers not want such comfort level? They deserve it and the insurer’s silence about it is tantamount to disservice. Nobody likes to be opaque about tax benefits of the product, and especially they don’t want nasty surprises of tax payment on the corpus at product maturity. What is not clarified is that policy term of five and 10 years does not qualify for 10(10D) tax benefit, only policy term of 15 years will.

Regards Kirang Gandhi Independent Financial Planner http://www.fpindia.in M-9028142155

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