What is GST?

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. The GST was implemented with an ideology of One Nation One Tax and also predominantly to remove the cascading effect (tax on tax) which was prevalent under the erstwhile tax regime. Since The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.

Goods & Services Tax (GST) was implemented in India with effect from 01st July 2017 & is a destination based consumption tax i.e. tax is levied wherein consumption takes place. The same is levied at each and every stage of value addition. Like other set of indirect taxes, the burden gets transferred at each and every stage and the final onus falls on the ultimate consumer.

The liability of indirect taxes is transferable, unlike direct taxation where there is no transfer of liability. For example, when a shopkeeper levies VAT, it is transferred to the buyer and this increases the cost of the product which the customer has to bear. After GST is implemented, this cascading effect of multiple taxes will be eliminated. GST’s implementation will also make it easier to compute the taxes to be paid and it will streamline the whole process of taxation.

With the implementation of the GST, the service tax became a part of GST. Similar to how it affected the other industries, this directly impacted the insurance industry. In a nutshell, the effect of the GST on Term insurance is a life cover where the policyholder pays the premium for a defined period. In the service tax regime, the policyholders used to pay 15% taxes on their premium towards term insurance but now under the Goods & Service Tax Regime, the GST on life insurance has been increased by 3%. The total tax that has to be paid towards term plans would be 18%.

Impact of GST on Life Insurance Premiums

Let us try to understand the impact of GST on life insurance premiums a little better. To delve into this discussion, it is important to understand how life insurance policies work. Primarily, there are three types of life insurance you can potentially opt for, such as:

Before the GST was introduced, the premiums or the ULIP charges paid were identified as service tax, charged at 15% in each case. All these rates have now been replaced with GST. GST is calculated at 18%, which implies that the shift to GST resulted in an increase in premiums.

Types of insurance describe as under

  • Term insurance plans

A term policy is one of the most economical and preferred types of life insurance plans. It is a pure-protection plan because it only has a death benefit and not a maturity benefit. In case of the policyholder’s demise during the term of the term policy, the nominees will receive the sum assured. For term insurance, there is a standard 18% GST applicable on the premium payments.

  • Endowment plans

An endowment plan is a type of life insurance where there is both a death and a maturity benefit. This means the sum assured is paid in a lump sum either on the maturity of the insurance plan or in case of the policyholder’s demise. For endowment plans, the GST applicable is slightly different. For the first-year premium, there is a 4.50% life insurance GST rate. For the following years, there is a 2.25% GST rate applicable.

  • Unit-Linked Insurance Plans (ULIPs)

ULIPs are a little different from traditional life insurance products. They offer a policyholder an opportunity to grow their money through insurance. ULIPs are part insurance and part investment products. For ULIPs, too, the GST levied on the premium is 18%. The best part is that this GST rate covers both the fund management charges and the premium payments.

Calculation of GST

GST is essentially a charge for the supply of services under the life insurance policy, replacing the services tax, so the calculation goes on amounts as under:

The gross premium minus the amount allocated for investment, or savings on behalf of the policyholder, if such amount is informed to the policyholder.

  • For single premium annuity policies: GST is calculated at 10% of the premium
  • For all other cases, the GST is calculated at 25% for 1st year and 12.5% for 2nd year onwards on the premium charged. Therefore, as far as GST on life insurance premium is concerned, the rate stands at 25% of the premium of the first year and 12.5% of the premium in subsequent years is considered for tax calculation. So, if the premium of an endowment plan is Rs 20000, the rate of GST on life insurance premium of 18 percent will be applicable on the 25% of the premium i.e., on Rs 5000 in the first year and on Rs 2500 in the next year. This excludes single premium and term insurance policies, discussed next.
  • GST on Term Insurance: If the entire premium paid by the policyholder goes towards the risk cover in life insurance such as in term insurance plans, the GST of 18% will be calculated on the entire premium. If you opt for Future Generali Flexi Online Term Plan whereby the policy is purely a protection plan, you will be paying GST on the entire premium amount.

As compared to before, the impact has been a direct and simple jump from 15% to 18%. Since this has been passed on to consumers, policyholders should be careful about the premiums mentioned on the policy - whether they include the GST charges or not - and proceed to decide accordingly.

GST Rates Before and Now

In contrast to the service taxes imposed previous to the tax regime, these are the current life insurance GST rates that are in effect:

Insurance Product Taxes Applicable Applicability
Before Now

Term Insurance

15%

18%

On entire premium

ULIPs

15%

18%

On premium except for investment amount

Single-Premium Annuity Policies

1.50%

1.80%

On 10% of premium

Endowment Plans (First Year)

3.75%

4.50%

On 25% of premium

Endowment Plans (Renewal)

1.875%

2.25%

On 12.5% of premium

Health Insurance

15%

18%

On entire premium

Car Insurance

15%

18%

On entire premium

Riders Premium

15%

18%

On entire premium

Is it possible to claim a tax deduction against GST paid on my life insurance premium?

Yes, you are eligible to claim a tax deduction for the GST you paid on the premium of the life insurance policy. The provision under Section 80C and 80D of the Income-tax Act is that specified taxpayers could claim for deductions to the Insurance company on the total amount paid to them for specified insurance schemes. Subject to the maximum limit specified in these sections

You Can Save Taxes on Life Insurance Premiums Paid

Even though the GST may have increased premium costs for life insurance policies, there are still a number of tax deductions available in India that can help you reduce your income tax. You can receive a tax benefit with these deductions on both the premiums paid for your life insurance policy and the GST incurred as a result of those premiums.

Sections 80C and 80D of the Income Tax Act, 1961 are the two most widely used tax deductions that allow you to reduce your income tax in India, especially on your life insurance premiums paid. Your total insurance premiums, including the GST that applies to them, are eligible for deductions under Section 80C up to a maximum of Rs. 1.50 lakhs. And in the meantime, Section 80D gives you additional premium deductions if you chose a health rider along with your life insurance policy.

For example - If one purchases a health insurance policy at the age of 30 years and the insured amount being Rs 10 lakh from any insurance company say Future Generali India Life Insurance. The premium which is supposed to be paid in this case would be Rs 7,843 and GST of Rs 1,412 (18 per cent GST is applied on basic premium) where the overall premium will add up to Rs 9,255. In the other case, if the same policy is purchased by a person having attained an age of 50, then he is supposed to pay a basic premium of Rs 17,782 and GST of Rs 3,200. The overall premium payable amounts to Rs 20,983.

Thus in both the above cases, the amount which has been charged as GST applicable to the basic premiums, could be claimed for availing tax saving deduction benefit under section 80D. Thus in both the cases mentioned above we could claim a total premium of Rs 9,255 or Rs 20,983 as per section 80D. The tax saving deduction amount depends on the investment limit mentioned under a particular section in 80D

Conclusion

The overall impact of GST is nominal even though both the existing and new policyholders will have to bear the additional cost. As such, GST shouldn’t have any impact on the assessment of various life insurance policies, because the vital parameters will still stay the same.

Life insurance stays unchanged in its function - which is providing financial protection to the nominees and policyholders. Basic life insurance need for any individual should be such that it provides the family dependent on them sufficient money to maintain their lifestyle and meet their financial goals in the individual’s absence.