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.
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