For about two months now, the ULIP controversy has been on a pause as everyone involved waits for the Supreme Court to weigh in on the subject. The Supreme Court hearing on this case is scheduled in July. Of course, there may not be a quick resolution and it may take several widely-spaced hearings for the court to come to a decision. Even as things stand, the resolution of this issue has taken way longer than what had been promised in the beginning. As far back as 10th April, we were promised that the issue would be resolved within days. Really, this issue should have been resolved by the executive has been handed over to the courts because no one was willing to take a decision.
Moreover, there may be some chance that the Supreme Court may actually refuse to deliver an opinion on the issue of whether SEBI has any jurisdiction over the investment activities of insurance companies. The case itself only pertains to the combining of related cases filed in various high courts around the country and its possible for the court to rule on that issue without getting into the jurisdiction issue at this stage. All in all, this could be a long story yet.
At the heart of the problem is that ULIPs are primarily not an insurance product but a market-linked investment product and the SEBI Act empowers SEBI to regulate all such investment products that are offered to the public. However, there is another aspect of ULIPs' investment characteristic that has escaped comment, one which has nothing to do with whether SEBI's argument has merit or not. That is the tax-free status of their returns. Like all insurance products, the returns earned by ULIPs are free of income tax. However, the returns from the investment part of these products (and some of them are close to 100 per cent investment with negligible insurance) is also tax-free simply because these products come in the garb of insurance.
This is a puzzling anomaly in the way the Indian tax authorities treat investments. There is actually no basis for treating returns from market-linked, risk bearing investments the same as any other payout from an insurance company. In effect, returns from ULIPs are treated the same as the payout that beneficiaries get when an insured person dies. Quite separately from the issue of whether ULIPs should be regulated as an investment, the tax authorities should wake up and plug this hole and start treating ULIP returns as the investment income that it is.
This article was originally published on June 14, 2010.
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