In 2017, when the GST was implemented, it was the only topic of conversation. It was a tax that changed the game and affected different industries. GST on life insurance ultimately resulted in rate increases for several life insurance plans. This post will explain everything crucial for you to know and assist you in understanding what that implies specifically for you as a life insurance customer.
First, let us learn about life insurance. Life insurance is a legal agreement between a person and an insurance company where the person promises to pay some money in exchange for a premium which is given to their dependants after an unfortunate event or a set period.
What is GST?
Various indirect taxes, including VAT, service tax, excise duty, and others, were replaced by GST, or the Goods and Services Tax. It is a sort of indirect tax. It is assessed when you purchase or utilise a good or service.
Insurance falls under Financial Services. Prior to the implementation of GST, service tax was imposed on the premium paid for life insurance policies. It’s significant to note that the GST is not applied similarly to various life insurance plans.
What kind of taxation does life insurance incur?
Direct and indirect taxes are the two different taxation systems in India. You pay an indirect tax known as income tax on your earnings. Your salary, professional income, rental income, etc., are all included in this revenue. You submit your tax returns for income tax each fiscal year. GST on life insurance is a kind of indirect tax.
According to Section 80C of the Income Tax Act of 1961, you are eligible for tax deductions against the premiums you pay for life insurance policies. On the total amount of insurance premiums you’ve paid in a given year, you qualify for a deduction of up to 1.5 lakh, given the provisions in the Act are met. This differs based on the old and new tax regime. However, since GST is an indirect tax, it is applicable on life insurance premiums when purchasing and paying for an insurance policy.
How does the impact of GST change depending on the policy?
- Term insurance: A term policy is one of the most affordable and popular types of life insurance. Because it just has a death benefit and no maturity benefit, it is a pure protection plan. The nominees will receive the sum assured in the event of the policyholder’s passing during the term policy period. A standard 18% GST is charged on the premium payments for term insurance.
- Endowment plans: A type of life insurance called an endowment plan offers both a death and a maturity benefit. This indicates that the money assured is paid in a lump sum either at the insurance plan’s maturity or in the event of the policyholder’s passing. The GST that applies to endowment plans is a little different. The initial premium has a life insurance GST rate of 4.50%. A 2.25% GST rate will be in effect for the following years.
- Unit-Linked Insurance Plans (ULIPs): ULIPs differ slightly from conventional life insurance plans in some ways. They give policyholders a chance to increase their financial security through investments. ULIPs are products that combine insurance and investing. The GST assessed on the premium for ULIPs is also 18%. The best thing is that this GST rate includes both premium payments and fund management fees.
How do the GST rates before and after compare?
Here is a comparison of the GST rates for several types of life insurance policies before and after.
| Life insurance product | GST% |
| Term insurance & ULIP | 18% |
| Endowment plan (first year) | 4.50% |
| Endowment plan (subsequent years) | 2.25% |
| Single premium annuity plans | 1.8% |
Can I deduct the GST paid on my life insurance premium?
Yes, since the GST is a part of the premium, you may deduct the GST when claiming for the Section 80C tax deduction. This is only allowed if the total premium deduction you request, including any relevant GST, stays within the overall Section 80C maximum of 1.5 lakhs.
Is there a bright side to how the GST will affect life insurance?
There is a silver lining even though the main effect of GST on life insurance policies was a rise in the premium cost. The main objective of insurance is to provide financial security. Therefore policyholders have stopped viewing life insurance as merely a tax-saving tool. Some life insurance companies have chosen to create their policies in a way that gives their clients better discounts.
A life insurance premium calculator can help you determine the life insurance plans best suited for you by giving you a premium estimate.