Shariah Compliant ULIP / Insurance / Pension Funds in India: Are they really Islamic?

I never felt the need to write an article related to ULIP or Insurance/ Pension Funds being Islamic. I thought it was clear. But it seems there have been some funds launched with the ethical/pure tag and labelling them shariah compliant.

This article is specific to Shariah based Insurance funds. For other insurance discussion, please refer these posts:
Is Life Insurance Halal in India
Is LIC policy Halal or Haram


Let me list all these fund first:

1. Bajaj Allianz Pure Stock Fund
2. Bajaj Allianz Pure Equity Fund
3. Bajaj Allianz Pure Stock Pension Plan
4. Tata AIA Life Select Equity Fund
5. Tata AIA Life Future Select Equity Fund

Bajaj Allianz Funds:

Straight from Bajaj Allianz policy document, we get this:

Pure Stock Fund: (SFIN: ULIF02721/07/06PURESTKFUN116) 

The investment objective of this fund is to specifically exclude companies dealing in gambling, contests, liquor, entertainment (films, TV etc.), hotels, banks and financial institutions. 

Portfolio Allocation: 

Equity & Equity Related Instruments: Not less than 60% 

Government treasury bills (Non-interest bearing): Not more than 40%

The equity investment is in non-haram sectors. But the stocks themselves either take interest or give interest; so nothing is mentioned about it.

Also as can be seen from the last line it can invest up to 40% in non-equity. Note that there is no such things as non-interest bearing Government Treasury bills.

Actually the word interest is hidden in case of Government Treasury bills and in many places it is written that they are non-interest bearing.

From the RBI docs, we have the definition:

a. Treasury Bills (T-bills)

1.2 Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price 

You will find it mentions "pay no interest". However those who know a little finance should be alarmed by 2 words used in the definition "money market" and "debt instrument". These 2 terms mean pure interest based investments. Let me explain:

For example, a 384 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 93, that is, at a discount of say, Rs.7 and would be redeemed at the face value of Rs.100/-.

So what it means that you invest Rs. 93 and after 384 days government will return you Rs. 100. You make a profit of Rs. 7 but that Rs. 7 is not profit as these people make you believe. That Rs. 7 is the interest the government pays you (approximately 7% interest rate for a year)

You can google for the Bajaj Allianz Pure Stock Fund and open MorningStar website. It can be seen that 

76% is invested in stocks

16% in bonds (pure interest)

7% in cash (may be in bank with interest or may not be - no details)

I am not aware if they are cleaning these profits. (If they are then there is some hope)

I don't thing I need to analyze any of the other Bajaj funds since it is clear how the investment is done.

Tata AIA:

In this cases things seem better. Investment pattern seems simple:

80% in equities

20% in cash and bank (non-interest account)

So this is definitely better. From MorningStar website it can be seen less than 2% is in cash; remaining all is in stocks. Stocks avoid all haram sectors. But the stocks do have some interest taking and some interest giving components themselves. Not sure if the Tata ULIP are cleaning this part similar to the cleaning done in Tata Ethical Mutual Fund.

Save Tax from donations (Zakat, Sadaqa) given to Charities (NGO, Madrasa, Islamic Trusts)

As a financially able Muslim, you will be giving the Islamic charities of Zakat and Fitra. These donations can be given to individuals like your relatives or neighbourhood and you are obliged to give them preference by religion.
Additionally in case you are giving financial assistance to registered Madrasas and Islamic Trust or other NGO's you maybe eligible for I.T. deductions.
Note: For this the receiver has to be registered with I.T. Office and not just registration with any other government body. Sadly most Madrasa are registered with Government but not registered with I.T. Office and hence you cannot claim the deductions.

In India under Income Tax laws (Section 80G), you are eligible for tax deduction for your donation albeit several conditions. Maybe if you meet all the conditions than you might save tax for few thousand rupees:

1. Donations of cash only and not in kind.
2. If by cash, maximum deduction allowed is for Rs. 10,000 donation. Else the limit is higher for cheque/ draft/ electronic payment.
3. PAN of the donee is the most important thing needed.
4. Restrictions on the donations:
• Organizations specified by the government (allowing 100% or 50% deduction)
• 50% deduction for social welfare/ minority welfare and religious trusts.

Example: You have taxable income exceeding the basic slab. Say Rs. 4.5 lakhs. 

So tax on Rs. 2 lakhs @ 10% = Rs. 20,000 as tax

Suppose you pay zakat/ sadaqa of Rs 30,000. How much tax you will save?

50% of 30,000 = 15,000.

Tax is @ 10%. So tax saved is 10% of Rs. 15,000 = Rs. 1,500

In case your employer ask you upfront about it. You can declare the same and submit the proofs.
Else you can claim refund at the time of returns filing:

1. In your ITR form, the last tab/ section is 80G and it is here where you have to add your details.
2. In that there are 4 subsections: Goto Section "D. Donations entitled for 50% deduction with qualifying limits".
3. Enter all the required details. As I mentioned earlier the most important thing is the PAN of the organization.
4. Attach the receipts of your donation and then post the form. Keep a copy of the same.

That's it, now you can get back refund for the same.

Is LIC insurance policy halal or haram

I have already clarified in an earlier post that only term insurance can be considered in the subject of halal/ haram:
Is Life Insurance Halal in India

Building on that we can analyze the policies of India's favourite Insurance destination.
Many Muslims may have been subscribed to these policies both for tax benefits as well as the promising returns. Those that have been blessed by knowledge may have curiosity to research the term and may have invested in Unit Linked plans (ULIP).
But biggest problem of all Insurance based Investments is transparency. It is not at all easy to find where exactly your money is invested. Mutual Funds are so much better since you can see every percentage of where exactly it is invested.
Here we analyze the investment pattern which will conclude what is permissible and what is not. Although this article takes LIC for reference, but it is applicable to all insurance companies since they all have similar plans.


LIC Term Insurance Plans:

Plain simple explanation: Except Term Insurance (Assurance), rest all are not permissible.
The Term policies in LIC are named:

1. LIC's Anmol Jeevan 
2. LIC’s Amulya Jeevan
3. LIC eTerm policy

All are pure insurance and not investment that will give you return on maturity. Since these are not "money-back" plans there aren't any investments made.
These are the only ones fine; rest all are non-permissible. Let us explore each category and check the reasons for the same.


Endowment Plans:

Whether it is single premium or any other Xxxxx Jeevan plan it doesn't matter. The fact that you are getting money back points to some form of investment. So we only have to examine where the returns from investment are coming.
All plans of LIC invest into Government debt unless explicitly specified that the plan investments majorly in equity.
So government debt means loan to government and the profit is gets is the INTEREST it receives from government for those loans.
So all these plans are just Interest based investments and obviously not permissible.


Money Back Plans and Child Plans:
Exactly same investment pattern as Endowment plans. Hence Interest based investments and obviously not permissible.


Pension Plans:
Similar problem either Interest based (Jeevan Nidhi) or Annuity based (Jeevan Akshay).
Annuity is nothing but interest earnings.


ULIP (Unit Linked Insurance Plan):
This is one plan that is sold to many Muslims who might raise the interest objection to an insurance agent. Many Muslims are told that investment plan can be chosen and you can invest 100% into stock market which is halal.
However, things are not so simple.
And also here comes the comparison with Mutual Funds. In case of Mutual Funds I can easily search and get the complete investment breakup of every single rupee. I know how much is invested in equity in which sectors and in which exact company's stock. This helps in finding out how much of the MF investment is in haram stocks.
All this is very difficult in ULIP. You cannot easily get these details at all. And in case you can get the details, please check the stock market investments. Am sure you will find major part of investment in Financial Sectors especially bank stocks.
Also not 100% is allowed in stocks. Most plans will restrict it to 70-80% in stocks and rest will be in Government Securities or Money Market Instruments (both interest based)
And this is the reason why ULIP cannot be counted as halal.


In the end I would suggest to completely read the policy document carefully and research on the internet. Do not fall into the Insurance Agents trap or the Investment trap since it is clear that other than basic life insurance rest all is purely interest based income.

Halal Tax Saving by House Rent or HRA

There are certain legal conditions to be met before you can claim HRA deduction/ exemption. I have tried to make it as simple as possible.

But first discuss housing aspect:

1. You or your spouse or your minor child do not own a house. Even if your parents own a house, HRA can be claimed by giving them the rent and which will be part of parent’s income.
2. You own a house in one place and do not live there but live in a different place.
3. You have bought a house but have no possession yet.
4. You have rent receipts or legal agreement for the same.

I have not included home loan conditions above, since I assume a Muslim won’t be taking one.

For HRA to work there are 2 options:

     A.      You receive HRA component in your salary: Section 10 (13A) exemption

     B.      Your don’t receive HRA component or are self-employed: Section 80GG deduction

You can use either of these options, not both.

Basic Definitions used in calculations

Financial Year: A year starting from April 1 of one year and ending at March 31 of next year.

Basic Salary:      Basic component + any Dearness Allowance + any Fixed Commission

Total Income:   Entire amount earned during year minus all tax deductions and exemptions. Amount earned need not be just salary. But any additional perks or income from other sources or financial instruments. Basically just about anything that contributes wealth to your kitty. All tax deductions and tax saving exemptions need to be subtracted except the Section 80GG one for rent.

Section 10 (13A): HRA component in salary.

This is simple enough and is discussed on several sites. The amount of exemption available for a financial year is minimum of the following:

1.       HRA received in salary.

2.       Rent paid minus 10% of Basic Salary.

3.       50% of Basic Salary received for Mumbai, Delhi, Chennai, Kolkata or 40% of Basic for other places.

Section 80GG: No HRA component.

This is minimum of the following for a financial year:

1.       Rs. 24000 (in case deduction is for less than a year, calculate at Rs. 2000 per month).

2.       Rent paid minus 10% of Total Income.

3.       25% of Total Income.

Also in this case an additional Form 10BA has to be furnished. Note here for almost everyone the amount comes to first option only because nowadays, anyone would be a paying a rent of more than Rs. 2000 per month.

Example:

A person living in Delhi receives following:

Basic Salary:      Rs. 10,000 p.m. = Rs. 120,000 p.a.

Total Income:      Rs. 30,000 p.m. = Rs. 360,000 p.a.

Rent Paid:          Rs.   7,000 p.m. = Rs.   84,000 p.a.

If case is of employee getting HRA as part of Total Income,

HRA Received:    Rs.   4,000 p.m. = Rs.  48,000 p.a.

So Section 10 exemption will be minimum of:

1.       HRA received = Rs. 48,000

2.       Rent paid (Rs. 84,000) minus 10% of Basic (Rs. 12,000) = Rs. 72,000

3.       50% of Basic = Rs. 60,000

i.e. Rs. 48,000

In case no HRA, calculation as per Section 80GG:

1.       Rs. 24,000

2.       Rent paid (Rs. 84,000) minus 10% of Total (Rs. 36,000) = Rs. 48,000

3.       25% of Total = Rs. 120,000

So here minimum is Rs. 24,000

Hence note that receiving HRA in salary is always better since using Section 80GG only rent up to Rs. 2000 per month is covered which is extremely less amount.