The government is mulling over tax sops for long-term investments of up to Rs 50,000 in insurance, two persons with knowledge of the development told ET.

The finance ministry has circulated a note seeking comments on creating a special window for investments up to Rs 50,000 with premium-paying terms of 15-20 years, they said.

People with knowledge of the matter said the tax break proposal may be taken up for discussion on Wednesday when Finance Minister P Chidambaram meets the sector regulator to firm up proposals for the ailing insurance industry. Ahead of the meeting, Insurance Regulatory and Development Authority (Irda) chairman J Hari Narayan said tax measures would benefit the industry.

"There is a list of issues that will be further discussed in another meeting with the finance minister on Wednesday, such as income tax and service tax," Narayan said. If the tax proposal goes through, the sector will see longterm capital flows.

The industry has been pressing for allowing deduction under section 80C of the Income Tax Act, 1961, on policies with terms of 10 years or more, besides a separate deduction limit of Rs 1 lakh for life insurance policies excluding pension policies. Executives of large insurance companies said that while the government may not bring bigticket reforms, it would take steps to lift the mood of the industry.

The proposals to increase foreign direct investment and increase the limit on equity exposure to a single company are also unlikely to be accepted in a hurry. "Change in equity exposure to single company can happen only after the amendment of the Insurance Act," the Irda chief said. "We are asking for a separate window because investments under section 80C include expenditures like tuition fees, mutual funds, bank deposits, with the share of investments in insurance, which is long term, falling to a large extent," said a senior executive of a large insurance company.

In a letter to the ministry, the industry has said that there is little incentive for investors to park money in longterm products, as the overall limit of Rs 1 lakh covers savings of longterm and short-term investments without any sectoral cap, and investors prefer short-term products.