GST Council to Exempt Term Life Insurance from Tax

Since the introduction of GST in 2017, the GST Council has taken several steps to simplify the taxation system for citizens. In recent news, a plan of GST Council to exempt term insurance from tax was in motion. It was said that the decision will lead to a revenue loss of ₹200 crore annually for the government.

However, the decision was postponed in the 54th GST Council meeting held on September 9. The proposal has now been referred to a Group of Ministers (GoM), which will study the matter further. The GoM will discuss issues such as whether the tax rates should be reduced or entirely exempt, who should be eligible for the exemption, what its likely impact will be, and more.

Impact on Investment-Linked Plans

The findings of the GoM will rationalize GST rates for term life insurance plans. But, what about investment-linked plans?

To get the answer to this question, you should first understand the reason behind the GST exemption proposal. The Council wants to improve insurance penteration in India, which currently stands at around 4% of the GDP as against the global average of 6%. Various stakeholders have pointed out in the past that the current GST rate of 18% is too high and discourages policyholders from buying insurance.

Thus, the plan of the GST Council to exempt term insurance from tax aims to make term policies more affordable for citizens and encourage risk management practices. It will also improve the insurance industry’s growth numbers.

As the Council seeks to improve insurance adoption and ensure families have a financial safety net for life’s uncertainties, it has chosen not to exempt investment-linked plans. Since these plans are primarily meant to earn returns, the GST on them will remain unchanged.

Term vs Investment-Linked Plans

Has the above section left you confused about the difference between term and investment-linked plans?

See, term plans are meant purely for insurance coverage. If you buy a term plan for 20 years, your family will get coverage in case of your unfortunate demise during that term.

On the other hand, investment-linked plans, as the name suggests, are meant for earning returns. A part of your premium is invested in the assets of your choice, while the rest is contributed to insurance. You get market-linked returns as well as risk coverage.

The differences do not end there. There are several other points of comparison as well.

Conclusion

Well, as the decision of the GoM is pending, what should be your next step? Till the GoM collects more data about the impact of GST exemption on policyholders, you should update yourself about the various term insurance plans in the market.

The fact is that whatever the GoM finally decides on, term insurance plans will continue to be relevant because of their risk protection benefits. It is thus important to stay updated on any GST changes impacting these policies while also securing your family’s financial future by getting a term insurance plan.

FAQs on GST Council to Exempt Term Insurance from Tax

1

What is the GST Council considering regarding term life insurance?

The GST Council is planning to exempt term life insurance policies from GST to make premiums more affordable. As of now, it has referred the proposal to a GoM, which will analyze the impact of the exemption. The final decision is expected to be made at the November meeting of the GST Council.

2

Will the GST exemption apply to all types of insurance products?

No. The GST exemption will be applicable only to term life insurance policies. It will not cover policies that include an insurance component.

3

Why is the GST Council likely to exempt term life insurance from tax?

The decision of the GST Council to exempt term insurance from tax is likely to have a positive impact on insurance penetration in India. It will make insurance more affordable, reduce the financial burden on policyholders, and result in the growth of the insurance industry.

Suggested Readings

1. Joint Term Insurance vs. Single Term Insurance

2.Advantages & Disadvantages of Term Insurance in India

3.ULIP vs Term Insurance: Key Differences