When the Goods and Service Tax (GST) was introduced in 2017, it made headlines - there was no sector in the country’s economy untouched by the reform. Implementing a reform as complex as ‘GST’ is a daunting undertaking - and the implementation has now grown into practice. The GST is a destination based tax which was proposed to be levied at all stages, from manufacture to consumption, and it has been in force for two years now. As a matter of fact, the GST was first announced in 2006 with the goal of simplifying and standardising the indirect tax regime in the country. It is aimed at eliminating the intermittent taxes on goods and services and replace them with one system.
With the implementation of the GST, the service tax became a part of GST. This had a direct bearing on the insurance sector just like it did on the other sectors. The impact of GST on life insurance was, to put it briefly, that these policies will have a tax levied as per GST at 18%.
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, namely, term insurance plans, Unit Linked Insurance Plans (ULIPs) and endowment policies, which also include the money back plans, and pay a lump sum on maturity/death or regular payouts. 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.
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, 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 percent 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.
- 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.
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.