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Tax Burden

Updated on October 4, 2023

Tax burden, in the context of insurance, refers to the various taxes and levies imposed by the government on insurance transactions, premiums, and policy benefits. These taxes are collected by the insurance company and, in some cases, passed on to the policyholders. The tax burden can affect the cost of insurance and the returns on investment-linked policies.

What is the tax treatment of insurance?

Goods and Services Tax (GST) in India applies to insurance premiums at varying rates depending on the insurance type. Investment-linked policies may encounter capital gains tax or related taxes on returns, subject to provisions of the Income Tax Act, 1961. On the other hand, certain insurance benefits like death benefits or maturity payouts are usually exempt under section 10(10D) unless otherwise specified under the provisions of the Act.

Why is it important to understand the tax burden in insurance?

Financial Planning – Understanding the tax burden associated with insurance policies is essential for effective financial planning. It helps individuals and businesses make informed decisions about their insurance needs, considering the after-tax cost and benefits.

Budgeting – Policyholders should account for taxes when budgeting for insurance premiums. Knowing the tax rates and when they apply ensures accurate financial planning.

Tax Efficiency – In some cases, there may be opportunities to optimize the tax efficiency of insurance investments. Policyholders can consult with tax professionals or financial advisors to explore tax-saving strategies within the legal framework.