The Life Insurance Corporation of India has tried to reassure its policyholders that policies bought before March 31, 2003, will not be affected by the government's proposal to tax returns on these covers.

The mad rush to buy single premium covers--as a means of tax planning--was not witnessed this fiscal.

LIC further does not anticipate demand for such products to continue in the coming fiscal, as it makes an unviable tax-saving instrument. 

This is largely on the back of the budgetary proposal to tax returns on single premium bonds and not grant them any tax rebate under Section 88 of the Income Tax Act. 

With other investment instruments in the market offering superior rate of tax-free returns--RBI 6.25 per cent bonds and US-64 6.75 per cent bonds--single premium risk covers have just died an early death.

SBI Life Company, managing director and CEO, R Krishnamurthy said, "We do not see a mad rush for these products as experienced last year. For us to push the product, the ambiguity needs to be removed".

OM Kotak Mahindra Life Insurance, CEO, Shivaji Dam said many policyholders had approached the company seeking clarification before investing.

"Demand for single premium policies has died down," he added. LIC agent S K Jain fails to see a rush for products such as Bima Nivesh despite the corporation having issued a clarification. 

"The market is pretty damp and there has been no rush for any insurance cover," he said.  Policyholders have sought to surrender their single premium covers before the end of the fiscal so that their returns would not be taxed.

The Budget had proposed taxing of returns of insurance policies where the premium paid amounts to more than 20 per cent of the sum assured.

LIC admitted that it has received numerous enquiries from policyholders and field force regarding the applicability of the proposed amendment for existing policyholders.

In its circular dated March 26, LIC said that while the matter is under discussion with the government, "we understand that the proposed amendment will be applicable only to policies issued after April 1, 2003. Therefore, it will not affect the policies issued prior to this date". 

The Insurance Regulatory and Development Authority has urged the finance minister not to tax returns on single premium products retrospectively.

Jaggit Singh, executive director, marketing, LIC, said that it remains to be seen how much demand remains for single premium covers after April 1. LIC sold about Rs 2,500 crore (Rs 25 billion) worth of single premium products this fiscal, Singh said.

This is half of what it sold in the preceding year (2001-02), when the interest rate offered were far higher than the prevailing six odd per cent.

The end is nigh

• LIC does not anticipate demand for such products in the coming fiscal

• Tax rebate under Section 88 of IT Act has been scrapped for single premium plans

• RBI's 6.25 per cent bonds and US-64 6.75 per cent bonds offer better tax-free returns