GST Council may exempt term life insurance from tax, relief unlikely for investment-linked plans: Report

The GST Council is expected to keep term life insurance policies free from goods and services tax (GST) while continuing to levy tax on policies that have an investment component, a report said. This decision, if taken, will encourage the adoption of life insurance policies that are purely aimed at protection.

“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 told the publication on condition of anonymity. The revenue loss from this exemption of term life insurance policies from the purview of GST will be around ₹200 crore annually, he reportedly added.

The panel is unlikely to change the taxation rate for investment-linked plans, which carry a GST levy of 18%, as per the report.

There was no official reaction to the news so far. Upstox could not independently verify the developments.

Term and investment life insurance plans

A term life insurance plan is one that offers financial security to individuals (policyholders) in case of their death during the policy’s term coverage. These policies provide coverage for a specific period generally ranging from 10 to 30 years. Premiums for these policies are comparatively lower as they offer protection against death without including any investment component.

This means that if the individual’s death outlasts the policy term, they will receive no payment unless the policy has a return of premium (ROP) option in which some or all of the premiums paid by the policyholder are returned if they outlive the policy term.

Investment-linked life insurance plans, on the other hand, provide life coverage as well as an investment component. In this, the policyholder is eligible to receive the death benefit along with the accumulated money over time. While premiums are higher for these plans, the savings collected during the coverage can be used for further investment, serving dual goals.

This decision to exempt term life insurance is expected to make insurance policies more affordable and boost demand among Indians, experts said.

While this step would boost demand for basic insurance plans, the investment-linked plans that will be continued to be taxed might see a ‘contrasting effect’.