The GST Council is anticipated to exclude term life insurance policies from the goods and services tax (GST), while maintaining the tax on insurance policies that include an investment element. This decision may enhance the demand for policies focused solely on protection.
A senior government official, speaking on the condition of anonymity, indicated that the decision is expected to be formalized during the GST Council meeting scheduled for September 9.
The official stated, “Life insurance that includes an investment component will not qualify for exemption. Exempting such policies lacks justification, as they fundamentally serve as investments. Our focus should be on exempting the uncertainties associated with life, rather than investments themselves.”
The estimated annual revenue loss resulting from the exemption of term life insurance from GST is approximately Rs 200 crore, he stated. This measure is expected to enhance the affordability of term life insurance, which may lead to an increase in its uptake among the Indian population.
Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm, stated, “This would represent a positive advancement. It would render insurance more accessible and could lead to a higher volume of business for insurance providers. Given that insurance penetration in India remains comparatively low in relation to other developed nations, this initiative would undoubtedly assist in closing that gap.”
Impact on Investment-Linked Plans
The anticipated exemption on term life insurance is likely to motivate a greater number of individuals to select basic life coverage. However, the ongoing taxation of investment-linked life insurance plans may produce an opposing outcome. These plans, which integrate life insurance with an investment element, are expected to remain comparatively expensive due to the prevailing GST rate of 18 percent.
Sehgal highlighted the possible consequences for these plans, remarking, “Simultaneously, this would affect investment and insurance plans, which would continue to incur GST and remain comparatively expensive.”
Term vs Investment-Linked plans
Term Life Insurance serves as a straightforward protection plan designed to provide financial support to beneficiaries in the event of the policyholder’s death within the policy’s duration. This type of insurance typically covers a defined period, which can range from 10 to 30 years. The premiums associated with term life insurance are typically lower, as the policy exclusively offers a death benefit without incorporating any savings or investment features. Should the policyholder survive the term, no benefits are disbursed unless the policy has an added return of premium rider.
Conversely, investment-linked life insurance policies integrate life insurance coverage with an investment element. These policies provide not only a death benefit but also build cash value over time, which can be utilized for investment opportunities. The premiums associated with these policies are higher than those of term life insurance, as they serve the dual function of offering protection and facilitating investment growth.
