Tax Structure Puts Pressure on Life Insurance Sector, Calls Grow for Policy Review

Nepal’s life insurance sector is increasingly feeling the strain of the existing tax framework, with industry stakeholders arguing that the current method of tax calculation does not fully reflect the nature of insurance business. Analysts say a review has become necessary as the system recognizes income but fails to adequately account for payouts made to policyholders, ultimately affecting long-term savings and social protection.

Under the prevailing structure, life insurance companies are required to pay a 30 percent corporate income tax on profits at the outset. Premiums collected from policyholders are invested, and the returns generated from those investments are treated as taxable income. However, amounts paid back to insured individuals—either as maturity benefits or claim settlements—are not factored into tax adjustments. In contrast, many developed economies allow such payouts to be offset during tax calculation, reducing the effective tax burden.

Because Nepal’s system focuses solely on income recognition, life insurers argue that it places them at a disadvantage. The impact becomes clearer when examining recent figures. Nepal Life Insurance Company, the country’s largest life insurer, paid taxes equivalent to nearly 53 percent of its profit in the fiscal year 2080/81, amounting to Rs 2.56 billion. While the direct tax rate stands at 30 percent, indirect tax effects significantly reduce funds that would otherwise strengthen the life insurance pool.

Industry experts stress that a more balanced tax calculation method would allow greater accumulation in the life insurance fund, which directly benefits policyholders. By regulation, 90 percent of returns from the life fund are allocated to policyholders, with only 10 percent going to shareholders. This means that any reduction in the fund due to taxation ultimately affects insured individuals rather than company owners.

The debate has broader implications for Nepal’s economy. As a resource-constrained country, Nepal has increasingly promoted social security mechanisms. However, coverage remains limited, and the state has been unable to reach a large portion of the population through public programs alone. Life insurance has partially filled this gap, providing financial security and risk coverage that would otherwise fall on the government.

Economists argue that taxing life insurance in a manner similar to conventional businesses overlooks its social role. Premiums are long-term savings, not short-term profits, and excessive taxation may discourage insurers from expanding coverage or offering better returns. A policy shift, they say, could help align fiscal objectives with social protection goals.

With insurance penetration gradually rising but still far from universal, experts believe reforming the tax treatment of life insurance could strengthen public trust, improve returns for policyholders, and support the broader social security framework. As discussions continue, the issue is increasingly seen not just as a sectoral concern, but as a question of how Nepal balances revenue needs with long-term economic and social stability.