Finance Ministry has decided to stick to its stance of taxing single-premium policies like Bima Nivesh, whose annual premium exceeds 20 per cent of the total sum assured value.

The government will, however, exempt all such policies from Income Tax if it is bought till March 31, 2003, a senior Finance Ministry official told PTI in New Delhi on Thursday.

The move assumes importance in view of the high growth in the sales of single premium policies of virtually all major players including Life Insurance Corporation, ICICI Prudential Life, HDFC Standard Life and SBI Life which were so far exempt rom tax and giving high returns.

Following the Budget announcement, the insurance industry had sought clarification on this issue from the government as it was not clear whether the policy that was bought before March 31 this year would be taxed under Section 10 (10D) of Income Tax Act or not.

Major players including LIC is believed to have met Finance Ministry officials to present their views and seek a clear cut guideline.

As a result, government was contemplating to issue a clarification last month.

But official sources said the Finance Ministry will stickto its stance and there was no need for any clarification on this issue.

A senior official of Central Board of Direct Taxes said the government decided to provide tax rebate on life insurance policies on grounds that it provided risk cover to the policyholder.

Since single premium policies were purely investment products like bonds and fixed deposits, there was no justification of exempting them from income tax, the CBDT official said.

The decision to tax single premium policies comes at a time when the returns on most savings instruments are falling.

Market sources said a large number of investors, who were unable to find profitable avenues to park money in the dismal stock market, invested heavily in single premium policies of insurance companies.

Moreover, many of the VRS-takers found these policies as the safest and most lucrative option to invest their lump sum income from their respective companies.