In a decision that could boost demand for pure protection policies, the GST Council is expected to exempt term life insurance policies from the goods and services tax (GST).
How Did This Happen?
It is noteworthy here that the GST will continue to tax insurance policies with an investment component.
On the condition of anonymity, a senior government official said that the decision is likely to be formalized in the GST Council meeting on September 9.
Further explaining the rationale of the exemption, the official said, “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.”
This would definitely affect the revenue as the loss from the exemption of term life insurance from GST is estimated to be around Rs 200 crore annually, the official said.
But on the positive side, the decision is anticipated to make term life insurance more affordable, potentially boosting its adoption among Indians.
The partner-tax at AKM Global, a tax and consulting firm, Sandeep Sehgal noted, “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.”
A Contrasting Effect
The aim behind this exemption on term life insurance is expected to encourage more individuals to opt for basic life coverage.
But it appears that the continued taxation on investment-linked life insurance plans may have a contrasting effect.
For the unawares, those plans, which combine life coverage with an investment component, are likely to remain relatively costly due to the GST rate of 18 percent.
“At the same time, this would impact investment-cum-insurance plans, which would still attract GST and remain relatively costly,” Sehgal noted while accessing the potential impact on these plans.
What Is The Difference Between Term vs Investment-Linked Plans ?
When it comes to Term Life Insurance, it is a pure protection plan offering financial security to the beneficiaries in case of the policyholder’s death during the term of the policy.
It is planned to provide coverage for a specified period, usually ranging from 10 to 30 years.
Due to this specification as it solely offers a death benefit without any savings or investment component, premiums for term life insurance are generally lower.
In these plans, after the policyholder outlives the term, there is no payout unless the policy includes a return of premium rider.
In contrast to this, the investment-linked life insurance policies combine life coverage with an investment component.
So, these policies offer a death benefit while accumulating cash value over time, which can be used for investment purposes.
As we know that the premiums are higher than term life insurance considering the dual purpose of providing protection and investment growth.
