LTC benefit on life insurance: Confusion prevails over GST rate

The Ministry of Finance, while giving further clarification in respect of Special Cash Package equivalent in lieu of Leave Travel Concession (LTC) Fare for the Central Government Employees for the block 2018-21, had issued an Office Memorandum on November 25, 2020, that contained the mention of insurance premium as one of the services eligible under this LTC Scheme.

Against the query – if payment of premium of already existing insurance policies be covered under this scheme – the OM said, “The special cash package envisages just the purchase of goods and services with GST of 12 per cent and above made during the period between 12.10.2020 and 31.03.2021. Payment of premium of existing insurance policies does not fall under this category. However, payment of premium for insurance policies purchased during the period between 12.10.2020 and 31.03.2021 is eligible for reimbursement under the scheme.”

Subsequently, the scheme was allowed for public sector as well as public sector organisations where LTC benefits are already in place.

However, in most private sector organisations, LTC is part of the CTC, so no extra money is given as LTC reimbursement. As a result, instead of paying money under the LTC Scheme, such organisations will deduct the eligible LTC Scheme amount from the taxable part of salary of the employees availing the Scheme as tax-free reimbursement.

As premium on insurance policies attracts 18 per cent GST, premium paid on new life insurance policies (issued between October 12, 2020 and March 31, 2021) is allowed as eligible services under the LTC Scheme. However, as the GST is not charged on the entire premium (e.g. charged on 10 per cent of premium for single-premium policies resulting in 1.8 per cent effective GST on the entire premium amount), the employees as well as the accounts departments of various organisations are getting confused.

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Confusion prevails on endowment plans as well, as 18 per cent GST is charged on 25 per cent of premium amount for the first year and on 12.5 per cent of the premium amount in the subsequent years resulting in 4.5 per cent effective GST in the first year and 2.25 per cent effective GST in the subsequent years on the entire premium amount.

“In accordance with the clarifications dated November 25, 2020 issued by the Ministry of Finance, it is clarified that only premiums paid in respect of such policies which are purchased between 12.10.2020 to 31.03.2021 are eligible for benefit under the LTC Scheme. Further, it is necessary for the goods purchased or services availed i.e. premium in the given case to be subjected to a GST rate of 12 per cent or more in case for the same to be eligible for benefit under the scheme. The Office Memorandum dated October 12, 2020 while putting forth the eligible criteria has used “purchase of such items/ availing of such services which carry GST rate of not less than 12 per cent from GST registered vendors/ service providers has been used’,” said Dr. Suresh Surana, founder, RSM India.

“Prima facie it seems that the intent is to cover life insurance policies on which 12 per cent or more GST is attracted and it can be inferred that even if the effective rate of GST is less than 12 per cent (single-premium policies / endowment plans, etc), the benefit of LTC may not be denied,” he added.

However, as the benefits may be availed by the employees in form of deduction from the taxable income mentioned in Form 16 and can’t be claimed separately while filing the Income Tax Return (ITR), they have to depend on the respective accounts departments to allow the benefits.

With the confusion prevailing over the effective GST rate on life insurance premium, accounts departments are refusing to allow the life insurance premium as eligible benefit under the LTC Scheme.

“As there is a lot of ambiguity on this, a clarification in this aspect may be expected from the government,” said Dr. Surana.

With less than a month left to avail the scheme and deposit the vouchers/bills before March 31, 2021, the Central Board of Direct Taxes (CBDT) has little time to allow the eligible beneficiaries to avail the benefits on life insurance premium.