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| July 29, 2016 |
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Impact 
The concept of "one nation, one tax" has finally become a reality now. The Parliament has recently passed the much-awaited Goods and Services Tax (GST) Bill, clearing all roadblocks. There's every reason why we should celebrate this moment as it's been a landmark reform indeed. After all, from soap to sedan, all goods are likely to become cheaper. That being said, services are going to cost you more. As a result, those who pay a hefty premium on life, health or motor insurance policies may feel the pinch once the GST is implemented.
More to the story…
Please don't forget services are taxed at 15% right now, all inclusive of basic service tax plus cess. Although the GST rate is still undisclosed, the much-accepted rate has been 18%. If GST is implemented in April 2017, along with all other services, tax on your insurance premium may also go up by up to 300 bps. One basis point is a hundredth of a percent.
How much more will you have to shell out?
Well, it depends on the nature of the insurance policies you hold. Not all policies attract 15% service tax at present. Moreover, a method of calculating service tax also differs from the one policy to another. Under Unit-Linked Insurance Plan (ULIP), the service tax is calculated on the component of the premium that goes towards covering risk. However, in the case of endowment plans, the service tax of 3.75% is imposed flat on the amount of premium you pay.
Impact of GST on your insurance premium
| Type of Policy |
Current |
After the implementation of GST |
| Term insurance / pure risk insurance policies |
15.00% |
18.00% |
| ULIPs # |
15.00% |
18.00% |
| Health insurance policies |
15.00% |
18.00% |
| Annuity: Single Premium |
1.50% |
1.80% |
| Endowment policies (1st year) |
3.75% |
4.50% |
| Endowment policies (2nd year onwards) |
1.88% |
2.25% |
| Motor insurance policies |
15.00% |
18.00% |
# Service tax is deducted from the risk portion of the premium
(Source: ICICI Prudential Life, IRDA, PersonalFN Research)
As you can see in the table, clearly the term insurance plans and health insurance policies will be the most affected categories after the GST is implemented. From the current 15%, the service tax levied on the premium may climb to 18%.
One might argue the rise is proportionate across categories, then why will these two categories only be affected? The primary reason is health insurance and term insurance policies don't pay back unless something happens to the insured. To be more specific, under term plans, insurance companies are liable to make a payment only if the insured dies when the policy is in force. If he/she lives out the term, the liability of the insurance company is zero, and the premium one has paid, also not returned unless there's such a unique feature in the policy. Similarly, under health insurance coverage, there's no direct benefit offered to you unless you fall sick. Of course, the insurance company will add a No Claim Bonus (NCB) to your cover, but again, to claim this, you need to have a medical condition. The nature of such policies makes them price sensitive; meaning, people tend to go with the plans costing less. The higher incidence of service tax may aggravate the price wars among insurance companies, as the buyer is likely to become even more cost cautious. The same principle holds true for the motor insurance.
As per the Economic Times dated August 03, 2016, the life insurance segment has been shrinking. From 4.6% in 2016, the growth rate has fallen to 2.6% in 2016. The industry fears, the implementation of GST might drag the growth rates further.
What approach insurance buyers should adopt?
PersonalFN is of the view that, the premium shouldn't be the only consideration while buying any insurance policy. Rather, you should look at the track record of claim settlements at the insurance company and the quality of aftersales services. Please don't forget, the primary motive for buying any insurance policy is to cover risks, so don't get carried away by the lower premiums. Sometimes, it's better to ignore costs to an extent, if you are able to get what you were looking for.
PersonalFN maintains its view on term insurance and health insurance policies even after considering the impact of service tax post GST implementation. Buying a term insurance policy is one of the most cost-effective ways of covering risk. Similarly, every individual must purchase a health insurance policy. PersonalFN has written a plethora of articles on the subject. You might like to read some of the notable ones.
How to have an optimal life insurance cover?
Which is the best Term Plan?
Should You Purchase A Term Insurance With A Return Of Premium Option?
Should term insurance be made mandatory?
Health Insurance - 8 Things You Need to Know
Should You Opt for a High Value Health Insurance Policy?
Which is the best Health Insurance Plan? |
Impact
Pension Fund Regulatory and Development Authority of India (PFRDA) are in a process of launching two new scheme. PFRDA which regulates the National Pension System (NPS), has planned to offer higher flexibility to the investors. With the new products in the pipeline, it aims to offer two investment options—aggressive and conservative. The aggressive option will allow the investor to invest upto 75% of his/her corpus in equity, which will subsequently reduce as the subscriber ages. Similarly, the conservative option will also see a gradual decline in the equity exposure of the customer. The only difference is, here, the maximum equity exposure can go up to 25%.
Currently, PFRDA allows investors to have upto 50% of equity exposure at max.
In the recent times, the Government has also encouraged Employees' Provident Fund Organisation (EPFO) to hike its equity exposure. However, it has not gone down too well with the labour Unions. They have been of the view that, the Government can't risk the money of labours in equity markets, unless, the Government provides a sovereign guarantee. It is unlikely that the to-be-launched schemes of PFRDA will meet the same fate as they are optional.
PersonalFN is of the view that, you shouldn't solely rely on EPF and NPS to retire peacefully .It is important for you to have a personalised retirement plan in place. PersonalFN offers some useful advice on retirement planning through its subscription-based service, The Retirement Letter. |
Impact
India is warming up to welcome a reform in indirect taxation, termed as one of the biggest reforms post-independence. In all likelihood, the Good and Services Tax (GST) is soon to become a reality before this monsoon session of the parliament ends. For the last two years, the NDA Government has been sweating to pass the GST Bill. Finally now, it can see some light at the end of the tunnel. Lok Sabha has cleared the Bill without many glitches, but it was stalled in Rajya Sabha for months, where the ruling alliance did not have the majority needed to pass the Bill. However, it seems, the Government might have managed to reconcile differences with the opposition.
Without any doubt, the proposed law is revolutionary but more than that due to the provisions proposed therein, the law came into the spotlight because of the political impasse it created. Its passage (and non-passage as well) became an ego problem for India's two national level parties. Since, the egos on both sides have mellowed, the way to enactment of the Bill appears clear.
PersonalFN recently covered two stories highlighting what the GST is all about and why it's being opposed.
If GST Is Revolutionary, Why Are Opposition Parties Blocking It?
Will The GST Bill Be Passed In The Monsoon Session Of The Parliament?
The media hype on GST has made many believe that GST is really going to change all rules of the game for the Indian economy. If you too believe so then probably you are missing the bigger picture.
To ready more about this story and Personal FN's views over it, please click here.
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Impact
If you invest in equity markets, directly or through mutual funds, you are probably very pleased with the on-going broad base rally in Indian equities. Markets are on their way to reclaiming all-time highs and investors are extremely bullish and complaisant at the moment. Bull markets make investors trust every positive comment made in the market. They invest in the hope of financial gain. But often, the reverse happens, they lose. Instead of cautioning you against following the momentum, mutual fund houses are trying to grow their Assets Under Management (AUM) by taking advantage of the upbeat investors' sentiment. As usual, they are set to launch some New Fund Offers (NFOs). This happens although the Securities and Exchange Board of India (SEBI) has expressed its disappointment over mutual fund houses launching NFOs instead of merging similar schemes.
However, mutual fund houses have used a different tactic this time. They have planned to launch speciality funds—these aim to help you in fulfilling specific goals, for example, children education The insurance industry has been launching such need-based solutions for a long time. So far, mutual funds haven't been as aggressive as insurance companies in targeting some common financial objectives of potential investors. But now it seems they are going to roll out need-based products quite often, which has been the flavour of the season.
Soon you may see these 4 NFOs on the shelf—Reliance Children Fund, SBI Children Benefit Fund, DSP Black Rock Children Gift Fund, and Mahindra Bal Vikas Yojana. The SEBI has received their draft offer letters.
To ready more about this story and Personal FN's views over it, please click here. |
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As the discussion on GST has been making rounds all over, you might have missed a crucial development that has taken place recently. The Government has made up its mind to raise cooking gas and kerosene prices every month now. In July the cooking gas and Kerosene prices were hiked by Rs 1.98 and Rs 0.25 respectively. In August too, the prices have gone up by Rs 1.93 for Cooking gas and another 0.25 for kerosene. As reported by the Business Standard dated August 02, 2016, the Government reduced the petroleum subsidy bill to Rs 27,571 crore in FY 2015-16 as against Rs 76,285 crore recorded in 2014-15. The Government is keen on cutting the oil subsidy bill in FY 2016-17.
PersonalFN is of the view that, while the rationalisation of subsidies is a welcome move, the Government will have to take into account its effects on household savings and inflation expectations.
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Sell-Off: Sell-off is the rapid selling of securities such as stocks, bonds and commodities. The increase in supply leads to a decline in the value of the security. A sell-off may occur for many reasons, such as the sell-off of a company's stock after a disappointing earnings report, or a sell-off in the broad market when oil prices surge, causing increased fear about the energy costs that companies will face
(Source: Investopedia)
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Quote : "More money has been lost trying to anticipate and protect from corrections than actually in them."-Peter Lynch
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