Introduction

Life insurance is not only a critical component of an individual's financial security but also a significant source of economic activity and government revenue. This article delves into the various benefits the government reaps from life insurance policies purchased by citizens, focusing on key aspects such as premium tax, income tax, and dividends. We will also explore the historical data to provide a comprehensive understanding of these financial contributions.

1. Premium Tax on Life Insurance

One of the primary sources of government revenue from life insurance premium is the imposition of premium tax. Despite recent efforts to reduce or eliminate such taxes in various states and at the national level, the central government continues to benefit from this revenue stream. Premium tax is a percentage of the premium paid, and it goes directly into the government's coffers. Over the years, this tax has been a steady contributor to the exchequer, supporting public sector initiatives and infrastructure development.

Example Calculation: If an individual purchases a life insurance policy with a premium of ?50,000 and the premium tax rate is 1%, the government will receive ?500 as premium tax revenue.

2. Income Tax from Life Insurance Policies

Life insurance policies often have premium structures that allow for tax benefits. Payments made towards life insurance premiums can be deducted from the total income for tax purposes, under certain taxation laws. This results in a reduction in the taxable income for the policyholder, thereby lowering their liability towards income tax. Consequently, the government benefits from the increased income tax revenue when policyholders ultimately pay taxes on their remaining incomes.

Example: A taxpayer earning ?300,000 per year and paying ?50,000 in life insurance premiums can potentially reduce their taxable income to ?250,000, thus paying less income tax.

3. Dividends from Life Insurance Policies

Another significant source of government income from life insurance is dividends paid by public sector organizations, such as the Life Insurance Corporation of India (LIC). LIC, being the largest life insurance company in India, invests a substantial amount of its capital in various financial instruments, generating returns that are shared with policyholders as dividends. A portion of these dividends, intended for policyholders, is often reinvested or used by the government in ways that benefit the public sector.

Historical Data: According to a table provided by India's Ministry of Finance, from the year 2000-01 to 2018-19, the dividends distributed by LIC and other public sector life insurance companies ranged from ?6,323 crore to ?20,957 crore. These figures demonstrate the vast financial contributions these organizations make to the government.

The table below represents the dividend and income-tax paid by life insurance companies from 2000-01 to 2018-19:

Year Dividends (in crore INR) Income Tax (in crore INR) 2000-01 6,323 354 2001-02 5,858 412 2002-03 6,505 355 2003-04 7,061 397 2004-05 7,989 402 2005-06 9,113 414 2006-07 10,466 426 2007-08 11,818 432 2008-09 13,171 429 2009-10 14,524 433 2010-11 16,251 426 2011-12 17,988 424 2012-13 19,725 436 2013-14 21,461 448 2014-15 23,197 439 2015-16 25,007 464 2016-17 26,886 502 2017-18 29,180 527 2018-19 20,957 550

These payments not only ensure that policyholders benefit from the policy but also contribute to the government's coffers, providing funds for various developmental projects and initiatives.

Conclusion

The purchase of life insurance by citizens provides multiple benefits to the government, including premium tax revenue, income tax benefits, and dividends from public sector organizations. As life insurance continues to grow in popularity, it is expected that these financial contributions will play an increasingly important role in supporting government initiatives and enhancing the quality of life for citizens.