- Why confusion remains over the tax treatment of premiums and payouts under current law
If you’re paying for a life insurance policy in Sri Lanka, you might be wondering: “Can I get any tax benefit from it? And when the policy matures or pays out, do I have to pay tax on the money I receive?”
It turns out that the answers aren’t so clear. While many people assume life insurance proceeds are tax-free, and some believe premiums can still be deducted from taxable income, legal experts and people in the insurance industry say the reality is more complicated.
The current tax law in Sri Lanka – the Inland Revenue Act of 2017 – doesn’t clearly explain how life insurance claims or maturity proceeds should be taxed. Nor does it offer any relief to individuals paying life insurance premiums. This lack of clarity has led to confusion among policyholders, sales agents, tax consultants, and even insurance companies themselves.
No more deductions for premiums
Chartered Insurance Risk Manager and Attorney-at-Law Deepthi Lokuarachchi explained that there were two things to look at: whether premiums are tax-deductible and whether the money you receive from a policy is taxed again.
“Under current law, individuals receive no tax benefit for payments made towards health or life insurance premiums,” he said. Previously, Sri Lankan law allowed individuals to reduce their taxable income by including life insurance premiums as a deductible expense. That changed when the 2017 tax law came into effect.
KPMG Sri Lanka Tax and Regulatory Division Principal Suresh Perera confirmed this shift. “The 2017 act removed many of the specific exemptions and deductions that were in the earlier law,” he said. One of those removed was the deduction for life insurance premiums.
In fact, under the older tax law – the Inland Revenue Act of 2006 – life insurance premiums could be claimed as a deduction if certain conditions were met. These included paying the premiums annually for at least three years and the policy not being a ‘pure endowment’ plan. There were also rules about whether the policy was issued in Sri Lanka or overseas.
“These provisions were meant to encourage long-term saving,” Perera said. “But with the 2017 law, those deductions were taken away.”
Is the money you get taxed?
So what happens when your policy matures and pays out?
Lokuarachchi explained that when someone bought a life insurance policy, they agreed to pay a regular premium, monthly or annually, for a set number of years. After that term ends, the insurance company pays them a maturity benefit. That payout includes two parts: the money the person already paid and the return earned from the company’s investments of that money.
That investment return is called the ‘interest’ or ‘profit,’ and here’s where the tax question comes in.
“The investment returns are already taxed at the corporate level,” Lokuarachchi said. In other words, the life insurance company has already paid taxes on the profits it makes from investing the pooled premiums of all policyholders.
“So when that money is paid out to the policyholder, they are effectively receiving a net return after tax,” he said.
This raises an important question: should a person be taxed again on money that has already been taxed once? “It may not strictly qualify as double taxation, but there is certainly an overlapping tax implication,” Lokuarachchi said.
Legal gaps and misinterpretations
Perera pointed out that there was no specific exemption in the 2017 tax law that said life insurance maturity proceeds or death claims were not taxable. The law lists various types of income that are exempt under Section 9 and the Third Schedule, but life insurance proceeds are not among them.
There is one exemption that often confuses people. The law says that compensation paid due to injury or death, such as a death gratuity from an employer, is not taxable. But Perera explained that this was different from a life insurance payout.
“A death gratuity is a lump-sum payment made by an employer or a Government body. It is not the same as an insurance payout from a private company,” he said.
Because life insurance claims are not specifically mentioned as exempt, tax officers could, in theory, argue that these amounts are taxable. That said, in practice, most insurance companies do not deduct tax when they pay out claims.
What the industry says
A senior source from a well-known insurance company confirmed this practice. “We have never said that life insurance premiums can be deducted from taxes,” the source said. “That provision was abolished decades ago.”
The source said that while some tax consultants still tried to claim old deductions, those claims depended on how individual tax officers interpreted the law. “Those practices are not entirely correct,” the source said.
When asked about the maturity sums paid to customers, the source confirmed that these were not taxed. “If a policy matures and pays Rs. 5 million, including dividends earned during the policy term, that money is not taxed, at least at our company,” they said.
They also pointed out that life insurance was treated differently from general insurance. If you pay for vehicle insurance, for example, you have to pay Value-Added Tax (VAT) on the premium. But life insurance premiums are VAT-exempt.
“If you pay a life insurance premium of Rs. 100,000, there is no VAT or other tax on that amount,” the source said. “And the dividends that accumulate are also not taxed.”
Annuities: One clear exemption
One type of insurance-related income is clearly exempt under the 2017 act: annuities.
According to the Third Schedule of the act, any income received by a senior citizen from a lifelong annuity, purchased from a licensed bank or insurance company for at least 10 years, is not taxable.
“This is one of the few areas where the law is clear,” Perera said. “But it applies only to a small group of people and specific types of products.”
VAT and the Rs. 60 m threshold
Perera also discussed the VAT implications. Under the VAT Act, services related to life insurance are exempt. That includes both ‘Agrahara’ insurance and crop or livestock insurance. So while insurance companies don’t charge VAT on premiums, the exemption isn’t especially useful for most policyholders.
“To benefit from a VAT exemption, you need to be VAT-registered,” he said. “But individual policyholders usually don’t meet the Rs. 60 million per year threshold to register for VAT.”
Therefore, while technically exempt, the VAT relief doesn’t change much for the average person.
A case for policy reform
Both Perera and Lokuarachchi agree that the Government should step in and provide more clarity. In their view, life insurance serves an important economic and social purpose and the law should reflect that.
“Life insurance helps mobilise long-term savings, provides security for families, and supports financial literacy,” Perera said. “One effective way to promote it would be to introduce clear exemptions in the law for life insurance claims and proceeds.”
He also suggested that offering some form of tax deduction for premiums would help increase participation and strengthen the culture of financial planning in Sri Lanka.
Lokuarachchi noted that many countries, including India, treated life insurance proceeds, especially death benefits, as fully tax-exempt. “Globally, long-term life policies, especially those with regular premium payments, often receive tax relief,” he said. “That’s something Sri Lanka should consider.”
Looking ahead
As it stands, life insurance in Sri Lanka is in a confusing spot when it comes to taxes. People don’t get any tax breaks for paying premiums. The money they receive from policies isn’t taxed in practice, but isn’t clearly protected in law either.
This has led to a situation where some insurance salespeople make claims that aren’t backed by legislation, while others play it safe and avoid mentioning tax altogether. Tax officers, consultants, and even insurers may interpret the law in different ways.
Until the Government updates the Inland Revenue Act to clearly spell out how life insurance premiums and payouts are treated, policyholders are left guessing.
For now, the advice is to not assume your premiums are tax-deductible, and if you are relying on your insurance payout for future planning, talk to a tax adviser who can help you understand where the law stands.
Key legal and tax facts
- Under the Inland Revenue Act (IRA) of 2017, there is no explicit exemption for life insurance claims or maturity proceeds in Section 9 or the Third Schedule.
- Premiums paid towards life insurance or health insurance are no longer tax-deductible under current law.
- Death gratuity or lump-sum payments from employers or the Government (compensation for death or injury) are exempt, but those do not cover contractual life insurance payouts.
- Life insurance premiums are VAT-exempt; general insurance (e.g. vehicle insurance) premiums are subject to VAT.
- Annuities: amounts derived by senior citizens from a life-long annuity (minimum 10 years, from a registered insurer or bank) are exempt from income tax under item (m) of the Third Schedule of the IRA of 2017.
- Under the older IRA of 2006, some life insurance premiums could be deducted if the policy was not a pure endowment, premiums were paid annually over at least three years, and the policy was Sri Lankan-issued.
Life insurance in Sri Lanka
- Total Gross Written Premiums (life + general): Rs. 322.04 billion
- Total assets of insurance industry: Rs. 1,219.27 billion
- Insurance penetration (as % of GDP): 1.08%
- Insurance density (premium per person): Rs. 14,694
- Policyholders’ Protection Fund: Rs. 13.13 billion
- Insurance agents registered: 50,178
- Insurance brokers registered: 82
- Agents represented by brokers: 657