The government will eliminate tax benefits arising from life insurance if the premium in any year exceeded 20 per cent of the sum assured from all policies sold from April 1.

The move will result in a decrease in returns on policies like Bima Nivesh and Jeevan Shree, Life Insurance Corporation's largest selling single premium policies, to around 4 per cent.

Bima Nivesh and Jeevan Shree, with a five-year term, offer returns of around 6 per cent at present.

The total mop-up by single premium policies is estimated at around Rs 10,000 crore (Rs 100 billion) and some agents are complaining of a drop in sales following the government's proposal to eliminate the tax benefits on these policies.

The industry and customers are not clear about when the tax will come into effect and cited this as a reason for a drop in sales.

A concerned life insurance industry is planning to meet next week to discuss the issue and make a representation before the government.

They want a rollback of Finance Minister Jaswant Singh's Budget announcement on February 28.

The industry also wants the government to extend the pension plan offering 9 per cent assured return to senior citizens and pensioners to the private players.

Last year also the life insurance industry had objected to the proposal to impose 5 per cent service tax. The government had to eventually bow to pressure. The tax was first limited to the risk element, subsequently the proposal was withdrawn completely.

The government has argued that the tax proposed this year will check misuse of the policies as a lot of people were using it in place of fixed deposit schemes.

Over the last 18 months companies have slashed the returns on the single premium policies from as high as 12 per cent in case of LIC's Bima Nivesh.