How does GST Impact your Insurance Premium?



Personal finances are affected by the implementation of the GST. Before the implementation of the GST, the tax on banking, insurance and other financial services was levied at 15%. After the implementation, the tax has increased by 3%. Now, policyholders should pay 18% GST on the insurance premium. The GST will be applied in different ways for various categories of plans. You should be aware of the tax calculation applied to the risk coverage and the savings.

GST Rules on Insurance Plans

The service tax is applicable in different ways on the risk component of the premium and the savings component of the premium. In fact, the service is applied on the risk portion of the life insurance premium.

The GST will be applied as per the following terms:

Case 1:
The gross premium minus the amount contributed for investment on behalf of the policyholder
Example:
Gross premium = Rs. 2000/-
Risk component = Rs. 600/-
Investment = Rs. 1400/-
The service tax should be paid on Rs. 600/- which goes towards the coverage of the risk.

Case 2:
For single premium insurance policies, 10% of the premium will be charged as service charge from policyholders.

Case 3:
For term policies, the entire amount will go for the risk coverage. Hence, the GST will be applied at the rate of 18% on the premium paid towards the term plan.

Hence, you will pay higher service tax for buying term plan or endowment plan.
Case 4:
Except the case 1, 2, and 3 listed above, the tax calculations will be done as follows:
25% of the premium paid in the first year
12.5% of the premium paid from the second year onwards

GST on term insurance plan

15% of the entire premium

GST on ULIP (Unit Linked Insurance Plan)

18% of premium minus investment (savings)

GST on annuity plan

10% of the premium

GST on endowment plan

25% of the first year premium and 12.5% on subsequent premiums

 GST on riders

18% of the entire premium

GST implications on new and existing policies

Existing, as well as new policyholders, will bear additional cost with the implementation of the GST.
If the insurance premium is Rs. 20,000, the tax on the premium was Rs. 3000 before the implementation of the GST. After the implementation of the GST, you will pay Rs. 3600/- as premium.

How to choose the best insurance plan?

You should choose the best insurance plan that delivers best benefits and cuts down the expenses.
The premium will be low if you enter the policy at a young age. The premium will be low if you maintain a healthy lifestyle. For non-smokers, lower premium rates are applicable by most of the insurance companies.

Every insurance company will maintain the historical data and based on the past expenses, the future premiums will be affected. You can buy cheap insurance policy by paying a very low premium towards the term plan. However, with the implementation of the GST, there will be a marginal increase of 3% on the service tax. Hence, you should choose the policy after considering the discount factors, as well as the taxes, levied on the insurance policy.

The unit-linked policies will get the benefit of insurance as well as investment. Before the implementation of GST, the service tax of 3.5% was levied on ULIPs. In the GST regime, it will be 18% on the insurance component.

Buying an endowment plan

There is a marginal increase of service tax on endowment policies. Before the implementation of the GST, 3.75% was charged as service tax on the first year premium. After the implementation of the plan, the service tax is levied at 4.5% as the tax will be levied on the 25% of the premium only. When you renew the policy by paying additional premiums, you will pay 2.25% as per the GST. The service tax before the implementation of the GST was 1.875%.

Unlike life insurance policies, a different kind of service tax rates are applied to non-life insurance policies. For example, you will want to pay 18% service tax towards the premium on car insurance and health insurance. The service tax on these plans was 15% before the implementation of the GST.
Before buying an insurance plan, you should go through the terms and conditions of the policy. You should be aware of the service tax levied on the insurance premium component. The tax exemption under Section 80C and Section 10 (10D) will enhance the gains made by investing in an insurance policy.

Conclusion
If the insurance companies are permitted to apply for the input tax credit, the policyholder will be benefited. With the implementation of GST, the insurance costs will increase. The insurance companies will incur higher expenses in terms of administrative and compliance costs. The government should address key issues so that there will be better clarity on taxation. The policyholder should incur higher expenses without getting proportionate benefits from the insurance company after the implementation of the GST. 

Comments