Anusuya is a widow raising her only child on a junior accountant’s salary. Her Rs. 5 lakh fixed deposit was meant for her child’s education. When she went to renew it, a bank employee persuaded her to move the money into a “special deposit scheme” with higher tax-free returns. She agreed. A year later, she received a notice demanding another Rs. 5 lakhs. Shocked, she discovered she had been sold a life insurance policy and this was the next year’s premium. If she did not pay, she was told, she would lose the money invested. The bank said she had signed the papers and bought the policy knowingly. Anusuya had trusted the bank and lost her hard-earned savings.
Anusuya’s story is not isolated. Across the country, people walk into bank branches thinking they are putting money into safe deposits, only to later discover they have been sold long-term insurance products they did not understand or need. This is not just about dishonest employees; the problem is structural. High upfront commissions create pressure to sell first and advise later. RBI has proposed reforms defining mis-selling, requiring explicit consent and providing refunds and compensation where mis-selling is established. These are important steps, but they mainly address how products are sold. To understand why this continues, one must look at how these products are designed.
Traditional life insurance policies are largely moderate-risk investment products. Around 60–65 per cent is invested in government securities (GSecs), with the balance in equity and other investments. Gross returns are moderate, but commissions and other costs absorb much of them. Consider a policy with an annual premium of Rs. 5 lakhs for 15 years. At a 9 per cent gross return, it could grow to about Rs. 160 lakhs. After costs, the investor may receive only about Rs. 118 lakhs — barely 5.5 per cent. A comparable mutual fund, even after all costs and capital gains tax, could leave around Rs. 127 lakhs. The investor is better off paying tax and investing through a mutual fund than buying the tax-free insurance product. In effect, the tax concession meant for the saver is captured by the insurer and distribution chain, not the investor. This was not how the exemption was intended to work. It was introduced during the 1991 crisis, when the government needed household savings to fund borrowing. Today, taxpayers may be bearing a cost of nearly Rs. 10,000 crore a year — estimated as 2 per cent of Rs. 4.72 lakh crore of maturity proceeds. The question is simple: is such a large taxpayer-funded incentive achieving its purpose?
Other countries handle tax exemption differently. In the US and UK, tax exemption is reserved for death claims, while maturity and surrender gains are taxable. Indian insurers argue that the exemption should continue because these products help finance government borrowing through (GSec) investments. If that is the objective, a transparent mutual fund with a similar investment pattern and lock-in should get the same tax treatment, so that the benefit reaches the saver rather than being absorbed by product costs.
The mutual fund alternative would introduce competition, but it will not by itself end mis-selling. As long as insurance commissions remain heavily front-loaded, aggressive selling will continue. Banks’ commissions should be spread over the policy term, like mutual fund distribution commissions. Along with RBI’s proposed refund and compensation rules, this would sharply reduce mis-selling.
Truth be told, for people like Anusuya, these are not abstract policy issues but questions of financial survival. She eventually recovered her money after persistent complaints and follow-ups, but lakhs of others may never do so. At a time when India’s financial system must work efficiently, the country can scarcely afford such a large taxpayer-funded giveaway to a structure that leaves savers worse off despite the subsidy. Either the tax concession must be reconsidered, or a transparent mutual fund alternative with similar tax treatment must be created. A tax benefit meant for savers must not become a subsidy for sellers.
The writer headsFee-Only Investment Advisers LLP, aSebi-registered investment advisor; X: @harshroongta
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
(A slightly different version of this column first appeared in the Business Standard on 11 May, 2026)