LTC benefit on life insurance: Confusion prevails over GST rate

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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 percent 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 percent 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 percent of premium for single-premium policies resulting in 1.8 percent effective GST on the entire premium amount), the employees, as well as the accounts departments of various organisations, are getting confused.

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

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