The Insurance Regulatory and Development Authority has clarified that only the premium collected for providing health cover in the case of unit-linked health insurance policies will be eligible for tax benefits.

At present, all health insurance products are eligible for tax benefits under Section 80D of the Income Tax Act, 1961.

Besides, all life insurance products enjoy tax benefits under Section 80C of the I-T Act. The Central Board of Direct Taxes (CBDT) would be issuing a clarification shortly, said sources close to the development.

Unit-linked insurance products provide a combination of risk and investment, with the investment risk usually borne by the investor.

In a unit-linked health product, a portion of the premium collected accounts for providing the health cover, while the rest is earmarked for market investment.

The regulator has found that in unit-linked health insurance products, almost 80 per cent of such premiums collected are invested in market instruments, whereas only 20 per cent account for the health cover.

In its actuarial evaluation report for 2007, Irda has observed that the proportion of Ulip (unit-linked investment plan) in the total product portfolio has gone up by 65-70 per cent, which ties up the fortunes of insurance companies and investors to the vagaries of the stock market.

In its revised guidelines for Ulips, Irda has made it mandatory for insurance companies to issue the sales document with clarity regarding the benefits of each product as a part of the overall policy document.

This is aimed at providing an idea to policyholders of what instruments they are investing in and what are the risks involved in them. In the document, insurance companies will have to explain the components that actually go towards the life cover and investment.