Goods and Services Tax (GST) apply to almost every sector and services including Life Insurance unless otherwise exempted by the GST Law. As per the latest rates, 18% GST applies to the life insurance premiums. While the rate may seem high enough to disrupt the returns on investment policies, its overall effect is nominal.
The GST in insurance policies applies only on the protection premium or a part of it. Given below are few popular insurance plans and how GST will affect your premiums for them:
1. Term Insurance Plans
Term insurance plans are pure protection plans, thus the GST applies on the entire premium amount. Thus, if your annual premium is Rs. 10,000 for a term policy, you will need to pay Rs. 11,800 including GST.
Most insurance riders or added benefits are pure protection covers. For example, accidental death and disability benefit is a popular protection rider. Similarly, the premium waiver option is also a protection rider.
Add-on benefits to life or health insurance plan also attract GST on 100% premium cost. Thus, if you add accidental and critical illness riders in the abovementioned term policy for an additional premium of Rs. 3000, your total premium including GST for the policy will be Rs. 15,340. (15,340 = 11,800 + 3000 + 540 for GST on Riders’ premium)
3. Health Insurance Plans
Health insurance plans like Mediclaim insurance and critical illness plans are also devoid of any investment premium. Thus, 100% of the premium charge attracts GST.
4. Guaranteed Savings Plans
GST applies a little differently on guaranteed savings plans like endowment and moneyback plans. GST on these plans applies only on 25% of the total premium in the first year and only on 12.5% of the premiums in the other years.
For example, if you start investing Rs. 100,000 a year in a guaranteed savings plan, 18% GST will apply only on Rs. 25,000. Thus, your total premium including GST will become Rs. 104,500 (100,000 + 4500 which is 18% of 25,000) in the first year.
However, from second year onwards you will only pay premium Rs. 102,250 including GST as the GST will apply only on 12.5% of the premium.
Life insurance investments are popular for their low investment risk and safe returns over a long period. That is why annuity plans from life insurers are the best when you want a safe a secure pension for the next two to three decades.
Goods and Services Tax applies only on the 10% of the single deposit made in the immediate annuity plans. Immediate annuity plans are very useful for retiring investors who have a large sum to invest for pension income. You can invest a large sum of money in an annuity plan to start receiving a regular income.
Example: If you invest Rs. 1 crore in an annuity plan, GST will apply to Rs 10 lakh. Thus, your total investment will be Rs. 1.018 crores (Rs. 1 crore Premium + GST Rs1.8 lakhs) including GST.
6. Unit Linked Plans (ULIPs)
Unit-linked insurance plans, or ULIPs, are the most popular and versatile wealth generation investment plans from life insurers. ULIPs are the only plan to allow you to invest in multiple funds and still enjoy tax savings on the entire investment.
GST on ULIP premiums apply based on the formula below:
“Total premium cost – Investment Premium”
So, the investment part of the premium does not bear any GST liability. However, the mortality premium will attract GST.
For example, if your total annual premium in a ULIP plan is Rs. 1 lakh and sum assured is Rs. 10 lakhs, your mortality (pure risk) premium is approx. Rs. 1000 (at the age of 30). Then, your total premium including GST would be Rs. 100,180.
ULIP policy issued on or after 1st Feb 2021, for which amount of premium payable for any of year during term of policy exceeds Rs. 2.5 Lakhs is not eligible for exemption under section 10(10D) and thus shall be taxable under section as capital gains under section 112A. Thus, profit arising from amount received under such ULIP shall be considered as ‘Capital Gain’ as per section 45 of Income Tax Act.
Summary of GST impact on different type of insurance plan premium are as follows:
|Insurance Plan||GST on Part of Premium|
|Term Insurance Plans||100%|
|Add-on Benefits or Riders||100%|
|Health Insurance Plans||100%|
|Guaranteed Savings Plans||1st year 25% & the rest 12.5%|
|Single-Premium Pension Plans||10%|
|Unit Linked Insurance Plans (ULIPs)||Total Premium – Investment part|
So, in wealth generation plans like ULIPs and guaranteed saving schemes, GST impact is quite low.
As you may already know, most of these insurance plans we discussed above, enjoy tax deduction under section 80C of the Income Tax Act, 1961. As per the rules you can claim GST paid on insurance premium as a deduction under the respective sections.
ULIPs are especially immune to the GST impact on returns as the charge is minuscule and only reduces as your portfolio grows. However, you end up paying a lot more in a guaranteed savings plan, where it impacts could range from 0.3% to 0.5% depending on the tenure of investment.
If we look at the GST’s impact on wealth generation and guaranteed savings plan it doesn’t create a lot of impact on returns. Additionally, you can claim the GST paid as a tax deduction in the year of investment.
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