GST on Life Insurance Premiums: All You Need to Know

GST in Insurance

GST, or Goods and Services Tax is one topic that most of us have heard about. However, let’s dig a bit deeper to understand more about it. Since its inception, the GST (or Goods and Services Tax), has been the subject of much confusion and debate in the country. This is due to the fact that almost every industry in the country has been influenced in some way by the implementation of GST and its associated rules. This is also true for the country's insurance industry, which is unsurprising.

GST has had a major impact on one of the most important types of insurance that consumers seek which is Life Insurance. The introduction of GST resulted in a rise in premium amounts because it encompasses service tax, which applies to the insurance business. However, the GST on life insurance premium has been attributed with a number of positive benefits on the life insurance industry. Let's go over the impact of GST on life insurance plans and how, despite the higher premiums, you can still save money on taxes in India.

What is GST, and How Does it Work?

Let's take a look at what the Goods and Services Tax is before we get into how it affects life insurance products. GST, or Goods and Services Tax, is a type of indirect tax that was implemented in 2017 to simplify the confusing landscape of India's multiple indirect taxes. Long seen to be unnecessary, complicated, and even predatory, these indirect taxes impose a significant burden on the ultimate consumer. With GST, all of these taxes were grouped into a single, unified umbrella, greatly simplifying the indirect taxation procedure.

Is There a Tax on Life Insurance Premiums?

Yes, a policyholder's premium for a life insurance policy is taxed in India. It's vital to remember that the tax paid on the life insurance premium is not to be confused with the premium paid income tax deductions. India's taxation system is divided into two categories: direct and indirect taxes. Income tax is a type of direct tax that you pay on your earnings. This revenue covers things like your wage, professional income, rental income, and so on. You file income tax every financial year when you file your taxes. Sections 80C and 80D of the Income Tax Act of 1961 provide you with the benefits of tax deductions for life insurance contracts. Deductions of up to 1.5 lakhs are available on all insurance premiums paid during the year. Nevertheless, GST on life insurance policy.

What is the Necessity for GST?

Indirect taxes have a transferable liability, unlike direct taxes, which have no transferable liability. When a shopkeeper imposes VAT, for example, it is passed on to the buyer, raising the price of the product that the customer must endure. The cascading impact of several taxes has been abolished by GST. The implementation of GST would also make it easier to calculate taxes to be paid and will streamline the entire taxation procedure.

What Does GST Mean When It Comes to Life Insurance?

Prior to the GST, life insurance premiums were subject to 15 percent service taxes, which included the Basic Service Tax, Swachh Bharat Cess, and Krishi Kalyan Cess. The GST on life insurance products was set at a standard 18 percent with the advent of GST. The increase from 15% to 18% had an effect on the end consumer, or policyholders, by increasing the premiums they were expected to pay for their policies. However, although the main focus of the GST on life insurance premium policies was to see an upsurge in premium rates, it was also found to be useful to the industry at large in other ways. It aided in the development of fierce competition among insurers, causing them to slash prices by reducing other policy-related costs. It also standardized the service tax component of insurance rates, encouraging customers to consider other, more significant features of potential life insurance policies.

What Does It Mean to Save Money on Life Insurance Premiums?

Although the result of GST on life insurance premium plans could have been to increase premium amounts, India, as a country makes available various deductions which make it feasible for you to reduce your income tax. You can profit from these deductions not just on the premiums for your life insurance policy, but also on the GST paid on those premiums. Section 80C and Section 80D of the Income Tax Act, 1961 are the most common deductions that allow you to save income tax in India, particularly on life insurance premiums. You can deduct up to Rs. 1.5 lakhs in total insurance premiums, including the GST, under Section 80C. It allows for deductions for things like life insurance premiums, investments in Post Office Time Deposit Schemes, and Senior Citizens Savings Schemes, among other things. In the meanwhile, if you have a medical rider on your life insurance policy, Section 80D allows you to deduct additional premiums.

How Does the Impact of GST Vary Depending on The Policy?

Consumers will bear the ultimate burden of a raised tax slab because they are the ones who purchase life insurance policies. The cost of providing services related to a life insurance policy will be :

  • The gross premium less the allotted investment amount or savings for the policyholder, if such amount is communicated to the policyholder, according to the Goods and Services Tax on the life insurance premium.
  • Single premium annuity policies: 10% of the premium is taxable.
  • In all other circumstances, the premium payable is 25% for the first year and 12.5 percent for the second year and beyond.
  • If the entire premium is for life insurance in India, GST of 18% will be applied.
  • GST on health-care insurance policies: The health insurance plan will now be taxed at 18% instead of the prior 15% due to the introduction of GST.
  • Term insurance policies are one of the most cost-effective and popular types of life insurance. Because it solely has a death benefit and no maturity benefit, it is a pure-protection plan. The nominees will receive the sum promised if the policyholder dies during the period of the term insurance. The premium payments for term insurance are subject to a regular 18 percent GST on life insurance premium.
  • Endowment plans are a type of life insurance that provides both a death and a maturity benefit. This means that the sum assured is paid in a lump sum at the end of the insurance policy's term or in the event of the policyholder's death. The GST rate for endowment plans is slightly different. A 4.50 percent life insurance GST rate applies to the first-year premium. A 2.25 percent GST rate will be applied in the following years.
  • ULIPs are a hybrid of insurance and investing. Hence, they are not the same as standard life insurance policies. They provide an opportunity for policyholders to develop their money through insurance. The premiums for ULIPs are also subject to an 18% GST. The best aspect is that this GST rate is applicable to both fund management fees and premium payments.

What are the Advantages of GST for Insurance Buyers?

The main advantages are as follows :

  • Despite the fact that Goods and Services Tax will increase the overall price of a policy, whether it be general or life insurance, it will raise competition among insurers. In order to attract buyers, insurers are likely to drop rates by reducing expenses linked to policy issuance and other elements that contribute to the overall cost of the insurance.
  • Moreover, they will improve the level of service provided while purchasing insurance products or filing claims. As a result, this is excellent news for purchasers who, when purchasing insurance plans, frequently overlook other variables and focus solely on price.
  • What buyers must understand is that premium is not the only aspect to consider when purchasing any type of insurance policy. The most important feature of any sort of insurance, whether it's car insurance or health insurance, is the protection it gives for your loved ones from unexpected disasters, as well as the various services provided by the insurer in terms of policy tenure and claims. As a result of GST on life insurance premium, insurers may be able to improve their products by improving service quality and improving the client buying experience.

Is it Possible to Deduct the Claims of a Life Insurance Policy from Your GST?

You may be able to claim a deduction on the GST on life insurance premium you pay. This is only allowed if the total amount of premium deduction you claim, including GST, does not exceed the overall limit of 1.5 lakhs set down in Section 80C.

Is it Worth it?

While the primary effect of the GST on life insurance policies has been an increase in premiums, there is a silver lining. Policyholders have shifted their focus away from life insurance as a tax-saving tool and towards the core objective of insurance: financial security. Another beneficial effect of the GST on life insurance premium is that some life insurance companies have decided to build policies in such a way that their customers get better discounts. Term insurance plans with a variety of features are available from insurance companies. Discounted rates, coverage for up to 100 years, and a claim settlement percentage of 99.06 percent (FY 19-20) are just a few of the benefits.

Disclaimer:

*Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
Make responsible financial decisions. Consult with your financial advisor before making any decisions on insurance purchase.

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