GST Impact on Insurance Premiums Explained

The Goods and Services Tax, commonly known as the GST, is applicable to a variety of commodities and services in India. Insurance is considered a financial service, and that’s why, GST on insurance is levied on all types of Life Insurance Plans. However, depending on the plan, the GST rate differs, so let us take a look at various GST charges for different types of insurance premiums.

What is GST?

GST stands for Goods and Services Tax, a new tax system that paved the way for a comprehensive overhaul of India's indirect tax structure. Enacted in 2017, the Goods and Services Tax Act has since undergone a series of revisions, and the Central Board of Indirect Taxes and Customs (CBIC) is the regulatory authority that oversees all modifications and revisions to this tax. With this tax reform, GST replaced a number of indirect taxes charged on various commodities and services, including GST on insurance premium.

How Does GST Affect Insurance Policies?

As we have already mentioned, the GST rates on various insurance policies vary. For example, the GST on Term insurance premium and the GST for health insurance will be charged differently. Remember, both new and existing policyholders must follow the latest GST regulations when it comes to insurance GST rate.

Check out how different insurance policies are affected by GST:

• Term Insurance Plans are the most cost-effective type of life insurance. GST on Term insurance premiums are subject to 18% tax, which implies that if you pay Rs. 100 for your premium, you will have to pay an extra Rs. 18 in tax.
• Endowment plans come with different GST rates and structures. The GST rate is 4.5% on the first year's premiums of endowment plans, but 2.25% on future premiums beginning in the second year.
• The GST rate on lump sum payments for single premium annuity products is 1.8%.
• The GST rate for ULIPs is 18%, however, it is not applicable to the investment amount, only the premium.

There are specific government-run health schemes where the health insurance GST rate does not apply.

What are the Types of Life Insurance Plans?

Here is a detailed analysis of GST on life insurance and how they differ depending on the type of life insurance.

1. Unit Linked Insurance Plans (ULIPs)

   Unit Linked Insurance Plans (ULIPs) offer a unique mix of investing and insurance choices since a part of the investment is used to cover your insurance with the remainder invested in market-linked products. The 18% GST rate on insurance premium on life insurance applies to a variety of expenditures in the plan, including premium allocation, fund management, mortality charges, and policy administration fees! ULIPs are taxed differently from the Term insurance GST rate, where GST is levied on the whole premium amount.

2. Endowment Plans

   Endowment plans include both life insurance coverage and a maturity benefit where the former is the insured sum given to beneficiaries upon the policyholder's death, and the latter is the amount paid out if the policy matures without the policyholder passing away. There are two categories to the GST on LIC premium structure for these plans. In the first year, the entire first-year premium is subject to 4.5% GST, however, beginning in the second year, the GST rate on premiums is reduced to 2.25%.

3. Term Insurance

   A term insurance plan provides basic life insurance coverage with no maturity benefits, and when you acquire a Term insurance, a flat 18% GST on Term insurance is applied to the whole premium amount, including any additional riders such as accidental death coverage.

4. Single Premium Annuity Plans

   These programs provide you regular income payouts for the rest of your life in exchange for a lump sum payment at the beginning of the plan. Furthermore, the whole lump sum payment you made will be subject to a reduced GST rate of 1.8% in single premium annuity plans.

GST Rates for Different Insurance Policies

Does GST for Insurance Offer Tax Savings Benefits?

Yes, you can claim a tax discount for life insurance premiums for which GST was paid. Payments made to keep a life insurance policy are deductible under Section 80C of the Income Tax Act, 1961, and this Section 80C allows you to deduct the whole amount you spend for life insurance premiums, including GST. Remember, this clause allows a maximum deduction of Rs. 1.5 lakh for various tax-saving investments. On the other hand, GST on health insurance qualifies for tax deductions under Section 80D. However, in both cases, retaining your premium payment receipts as proof is vital, and the premium amount and GST rate should be mentioned on these receipts.

Conclusion

There are multiple types of Life Insurance Plans and the GST on insurance policy you pay depends on the type of life insurance you have! Good news is, you can receive tax deductions from life insurance premium payments which will allow you to save tax money and receive additional benefits on your annual insurance payment as well.

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