Term life insurance plans in India might become cheaper
The Goods and Services Tax (GST) Council is considering a proposal to exempt term life insurance policies from GST, according to an anonymous senior government official speaking to Moneycontrol. This decision is expected to be finalized in the upcoming council meeting on September 9. The move aims to make these policies more affordable and encourage their adoption among Indians. However, insurance plans with an investment component will continue to be taxed under the current regime.
Rationale behind proposed exemption
Regarding life insurance policies with an investment component, the official said, "There is no sense in exempting that. It is basically an investment. We have to exempt the uncertainties of life, not investments." This statement provides insight into the government's rationale for maintaining a distinction between pure protection policies, and those that include an investment element in their structure.
Impact on revenue and insurance sector
The proposed exemption of term life insurance from GST is estimated to result in an annual revenue loss of around ₹200 crore. Despite this, experts believe that the move could stimulate demand for these policies. Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm, said that this would be a welcome step as it would make insurance affordable and potentially increase volume for insurance companies.
Continued taxation on certain insurance policies
The GST Council's decision to continue taxing investment-linked life insurance plans could have a contrasting effect. These plans, which combine life coverage with an investment component, are tipped to remain relatively costly due to the GST rate of 18%. Sehgal highlighted this potential impact, stating that "this would impact investment-cum-insurance plans, which would still attract GST and remain relatively costly."
Understanding term and investment-linked insurance plans
Term life insurance is a pure protection plan that provides financial security to beneficiaries in event of the policyholder's death during the policy term. It provides coverage for a specified period, typically ranging from 10-30 years. Meanwhile, investment-linked life insurance policies combine life coverage along with an investment component. Such policies not only offer a death benefit but also accumulate cash value over time for investment purposes.
