GST Council likely to exempt term life insurance from tax, no change in investment-linked plans

Exemption on term life insurance is expected to encourage more individuals to opt for basic life coverage

The GST Council is expected to exempt term life insurance policies from the goods and services tax (GST) while continuing to tax insurance policies with an investment component, a decision that could boost demand for pure protection policies.

The decision is likely to be formalised in the GST Council meeting on September 9, a senior government official said, requesting anonymity.

“Life insurance with an investment portion will not be exempted. There is no sense in exempting that. It is basically an investment. We have to exempt the uncertainties of life, not investments,” the official said, explaining the rationale of the exemption.

The revenue loss from the exemption of term life insurance from GST is estimated to be around Rs 200 crore annually, he added.

This decision is anticipated to make term life insurance more affordable, potentially boosting its adoption among Indians.

“This would be a welcome step. It would make insurance affordable and have the potential for increased volume for insurance companies. The insurance penetration in India is still relatively low compared to other developed countries, and this would certainly help in bridging the gap,” said Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm.

Impact on Investment-Linked Plans

While the exemption on term life insurance is expected to encourage more individuals to opt for basic life coverage, the continued taxation on investment-linked life insurance plans may have a contrasting effect. These plans, which combine life coverage with an investment component, are likely to remain relatively costly due to the GST rate of 18 percent.

Sehgal noted the potential impact on these plans, stating, “At the same time, this would impact investment-cum-insurance plans, which would still attract GST and remain relatively costly.”

Moneycontrol has reached out to the GST Council and finance ministry for comments. The story will be updated when they respond.

Term vs Investment-Linked plans

Term Life Insurance is a pure protection plan that offers financial security to the beneficiaries in case of the policyholder’s death during the term of the policy. It provides coverage for a specified period, usually ranging from 10 to 30 years. The premiums for term life insurance are generally lower, as it solely offers a death benefit without any savings or investment component. If the policyholder outlives the term, there is no payout unless the policy includes a return of premium rider.

On the other hand, investment-linked life insurance policies combine life coverage with an investment component. These policies not only offer a death benefit but also accumulate cash value over time, which can be used for investment purposes. The premiums are higher than term life insurance, reflecting the dual purpose of providing protection and investment growth.