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GST on Life Insurance: A Comprehensive Guide

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GST on Life Insurance: Get a Complete Guide | HDFC Life
May 16, 2024

Table of Content

 

Whenever you think of financially securing yourself, life insurance is something that you will very likely consider. Getting life insurance not only secures your family's financial future but lets you grow your savings. Nonetheless, while purchasing a plan, you need to have a detailed understanding of the taxes applicable, especially the GST or Goods and Service Taxes.

In this blog we will provide you with comprehensive details on different aspects of GST on life insurance premium, covering its variations and implications across different types of policies. The blog will give its readers a detailed understanding of tax deductions associated with life insurance premiums and any other tips to remember.

What Is GST?

Goods and Service Tax, or GST, is a significant tax reform that was implemented in India on 1st July 2017. This is a provision of indirect tax applied to the supply of all services and goods in India by both the Central Government and all state governments. It replaced several indirect taxes, including excise duty, VAT, service tax, etc.

GST is split into three parts, which are overseen by the GST Council: State GST (SGST) Central GST (CGST) and Union Territory (UTGST). These taxes are levied on all goods and services sold within every state and union territory. For goods and services sold between states, Integrated GST (IGST) is levied.

By removing obstacles across various tax regimes and streamlining taxation, the GST regime has strengthened the Indian economy. Before the Goods and Services Tax (GST), levies were taxked at each stage of the production process, driving up costs. GST eliminated the 'tax on tax' system, which would eventually lower inflation and assist in maintaining price stability.

Examining the Influence of GST on Life Insurance Premiums

The introduction of GST has significantly impacted the life insurance premiums in India. Following are the details you must know in terms of the impact of GST on life insurance:

  • Increased Cost of Premium for Policyholders

Before the implementation of Goods and Service Taxes, premiums of life insurance policies included a service tax of 15%. It included components such as Krishi Kalyan Cess and Swachh Bharat Cess. However, with GST, a standard rate of 18% tax is levied on all life insurance plans. This increase of 3% tax impacted a high premium cost for policyholders.

  • Impact on Different Life Insurance Policies

For a cost-effective life insurance alternative, think about term insurance, which has a fixed 18% GST on the whole payment. An additional life insurance premium GST rate of 18% is applied to ULIPs (Unit Linked Insurance Plans), which covers fund administration expenses, among other charges included in the premium.

  • Impact on compliance and input tax credit

The input tax credit of VAT was not available before the GST regime since the life insurance company was only centrally registered under the Service Tax Law. With the introduction of GST, input tax credit on VAT is eligible and hence there is a benefit to that extent.

However, there is an increased compliance requirements under GST since the life insurance companies were only registered centrally in one office under Service Tax Law, as against under GST they are required to register in each State from where the services are being offered.

Need for GST

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.

How GST Differs Across Various Types of Life Insurance?

The GST you tend to pay on your life insurance premiums differs according to the type of policy you invest in. The breakdown of the life insurance GST rate has been provided in detail below.

  • Term Insurance

A simple life insurance plan with no maturity advantages is what a term insurance plan offers. When you buy term insurance, a flat 18% GST is added to the whole premium amount—including any additional riders like accidental death coverage. For example, if your annual premium is Rs. 10,000, the GST you must pay is Rs. 1,800, or 18% of Rs. 10,000.

  • Endowment Plans

Endowment plans provide both life insurance coverage and a maturity benefit. While the former is the assured amount paid to beneficiaries upon the policyholder’s demise, the latter is an amount paid out in the event that the policy matures without the policyholder passing away.

There are two tiers in the GST on life insurance premium structure for these schemes. In the first year, the whole first-year premium is subject to a 4.5% GST. This is because 18% GST is charged on 25% of the premium as per Rule 32 (4) of CGST Rules 2017*. The GST rate drops to 2.25% on the premium amount beginning in the second year (18% GST on 12.5% of premium value).

If you have an endowment plan with a Rs. 5,000 annual premium, for example, you will pay Rs. 225 as GST (4.5% of Rs. 5,000) in the first year and Rs. 112.5 (2.25% of Rs. 5,000) in the second year.

  • Single Premium Annuity Plans

These plans provide you with regular income payments for the remainder of your life in exchange for a single lump sum payment. Additionally, the whole lump sum payment you paid for the annuity will be subject to a lower GST rate of only 1.8% (18% GST on the 10% value of the premium).*

  • Unit Linked Insurance Plans or ULIPs

A special combination of investment and insurance options is provided by ULIPs (Unit Linked Insurance Plans). A portion of your payment is used to cover your insurance, while the remaining amount is invested in market-linked funds.

Here, 18% GST on life insurance is also applicable, and it is applied to various costs in the plan, including premium allocation, fund management, mortality (risk-related) charges, and policy administration fees. ULIPs are taxed differently from term insurance plans, where GST is levied on the full premium amount. GST is not charged on the investment amounts under the plans provided the same is communicated to the policyholder separately.

How to Save Tax on GST Paid for Life Insurance?

You may be able to reduce your taxes by using the money you pay for insurance. Your GST on life insurance premiums paid are eligible for tax deductions under Section 80C of The Income Tax Act, 1961.

With it, a maximum of Rs. 1.5 lakh in deductions for premiums paid are allowed annually. Moreover, you can receive deductions under Section 80D up to Rs. 1 lakh annually if you have paid GST on health insurance premiums for yourself & your family (including your parents). Under Section 10 (10D), claims received against life insurance policies are eligible for tax exemptions.

It is highly important to remember, though, not all insurance plans provide these tax advantages.

GST Rates on Life Insurance Before and Now

Before the implementation of Goods and Service Tax, service tax was imposed on different types of life insurance policies. However, post-GST, the scenario is different. The table below gives you a comprehensive guide on pre-GST rates on life insurance and GST on life insurance premium rates.

Type of Life Insurance Policy

Pre-GST Tax Rate (Approx.)

Current GST Rate

Applicability of Tax

Term Insurance

15% (Service Tax + Cesses)

18%

On the total premium amount

Unit Linked Insurance Plans (ULIPs)

15% (Service Tax + Cesses)

(only on the charges levied)

18% (on charges levied)

Only on the premium and not on the invested amount

Endowment Plans (1st Year Premium)

3.5%

(Service Tax + Cesses)

4.50%

On the total premium amount

Endowment Plans (Subsequent Years Premium)

 1.75%

(Service Tax + Cesses)

2.25%

On the total premium amount

Single Premium Annuity Plans

1.50%

1.80%

On the total premium amount

Riders Premium

15%

18%

On the total premium amount

Car Insurance

15%

18%

On the total premium amount

Health Insurance

15%

18%

On the total premium amount

Can I Claim a Tax Deduction Against GST Paid on my Life Insurance Premium?

Yes, you can claim a tax deduction against the payment made for GST for life insurance premiums in India. Payments made to maintain a life insurance policy are deductible under Section 80C of the Income Tax Act of 1961.

The Goods and Service Tax is included in the premium price. Under Section 80C, the whole amount you pay for your life insurance premium—including GST—are deductible. Nonetheless, this section has a maximum deduction cap of Rs. 1.5 lakh for different tax-saving investments.

However, keeping your receipts for premium payments as proof is essential. The premium amount and the GST charged should be specified on these receipts.

Even while it is possible to deduct GST from insurance premiums, it is still a good idea to see a tax adviser for specific advice. You can ask your insurance company for an additional receipt detailing the breakdown if the one that comes with your premium does not include GST on life insurance premiums.

Are Goods and Services Tax Applied on Life Insurance Premiums?

Yes, sales of goods and services are subject to the GST regime. Insurance is viewed as a financial service in this context. Therefore, GST applies to the services rendered to you as a policyholder if you are purchasing insurance.

While the previous system of service tax is now obsolete, GST on life insurance premiums implies that you will be required to pay tax on your premiums that is levied by the insurance company. However, the exact amount of tax varies according to the sort of insurance policy you have.

Important Points to Remember

Here are a few key points to remember related to GST on life insurance premiums.

  • In India, there is an 18% Goods and Services Tax (GST) on life insurance premiums. This is not the same as the pre-GST era when a 15% service tax was in place.
  • GST is applied to the whole amount of paid premiums less the percentage allotted for investments (if disclosed to the policyholder).
  • Under Section 80C, the whole amount you pay for your life insurance premium—including GST—is deductible

Conclusion

Every policyholder must comprehend the intricacies of GST on life insurance premiums. Although applying GST increases costs, it is a necessary component of the tax system.

Being aware of how GST works with various kinds of life insurance plans enables you to make well-informed choices about your financial planning. Remember that even though GST for life insurance premiums may appear like an extra cost, life insurance plans offer considerably more financial stability and peace of mind than they carry tax repercussions.

FAQs on the Impact of GST on Life Insurance Premium

1. What is the significance of GST regarding Life Insurance?

GST benefits policyholders and the government alike by reducing the complexity of life insurance premiums and by substituting one charge for many levies. It breaks out the taxes contained in premiums, which simplifies tax administration and collection while promoting price transparency.

2. What are the advantages of GST on insurance premiums?

First of all, substituting a single GST charge for several taxes streamlines the tax system. This facilitates understanding of the policyholder of the entire tax component as well as that of the government. Also, transparency is further increased by providing a detailed breakdown of GST in the premium amount. It is crucial to keep in mind that these benefits need to be evaluated against the possibility of premium increases.

3. What does saving on Life Insurance Premiums mean?

Saving on life insurance premiums means finding ways to pay less for the same amount of coverage. It might entail selecting a longer policy term to spread the expense, obtaining a policy with a smaller death benefit, or being eligible for a better rate as a result of maintaining healthy behaviours. Your loved ones' financial security in the event of your death can be preserved while you free up funds for other necessities by reducing your premiums.

4. Does GST exclusively apply to insurance policies?

No, insurance plans are not exempt from GST. It is a significant tax imposed on the majority of products and services provided in India.

5. Does GST still apply to me if I pay my subscription in advance?

Yes, even if you pay for your life insurance payment in advance, GST is still applicable. The day the premium was due is crucial. GST will be charged whether or not you make the payment and if the deadline occurs on or after 1st July 2017.

6. What is the GST amount for a ULIP plan, and which charges are included in it?

The GST rate is fixed at 18% of the charges that are levied under your ULIPs. Conveniently, this one rate is applied on all charges viz, fund administration fees, switching charges, mortality charges, allocation charges, etc.

7. Will there be a breakdown provided for the GST component in my insurance premium payment?

Yes. The breakdown for Goods and Service Tax will be available in your insurance premium payment receipt.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

Disclaimer

#Tax applicability & exemptions are subject to conditions of the GST Law and its provisions.

#Tax Laws are subject to change from time to time.

#Customer is requested to seek tax advice from his Chartered Accountant or advisor with respect to his liabilities under the GST law.

*https://gstcouncil.gov.in/sites/default/files/Insurance_Builder_Intermediary_Services%20%281%29.pptx

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