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The introduction of Goods and Services Tax (GST) in India has had a significant impact on various sectors, including life insurance. Understanding how GST affects life insurance premiums is essential for policyholders.
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It helps them be better informed about the additional costs involved and how much they are actually paying for their insurance coverage. In this guide, we’ll break down the impact of GST on different types of life insurance policies in simple terms.
Term Plans
In India, GST was introduced on July 1, 2017, replacing multiple indirect taxes like service tax, VAT, and others. Life insurance premiums, like many other services, are subject to GST. As of now, the GST rate on life insurance premiums varies depending on the type of policy. The current standard GST rate applicable on most life insurance products is 18%, though how this applies differs across different policies.
GST is applied differently depending on the structure of the insurance policy. Let’s break down how GST impacts various life insurance plans.
Definition: Term insurance is pure life insurance that provides coverage for a specific period, and the sum assured is paid to the nominee in case of the policyholder's death during the policy term.
GST Impact: For term life insurance policies, GST is levied at 18% on the entire premium. Since term plans are pure risk cover, the entire premium amount is taxable.
Example: If your annual premium is ₹10,000, then GST of 18% will add ₹1,800, making the total premium ₹11,800.
Definition: Endowment plans combine both life cover and savings. They provide a lump sum payout either on death or at the maturity of the policy.
GST Impact: For endowment plans, GST is charged at 18%, but only on the risk portion of the premium (the part that covers life insurance), not on the savings component. This is because endowment policies have a dual structure — part of the premium goes towards life cover, and the rest is invested or saved.
Example: If you pay an annual premium of ₹20,000 and 60% of this goes towards savings, only the remaining 40% (₹8,000) is subject to GST. GST at 18% on ₹8,000 would be ₹1,440.
Definition: ULIPs are life insurance plans that combine life coverage with investment in stocks or bonds. A portion of your premium goes towards insurance, and the other part is invested in market-linked funds.
GST Impact: Similar to endowment plans, GST of 18% is charged only on the portion of the premium that goes toward life cover. The part of the premium that is invested is not subject to GST. However, other charges in a ULIP, such as fund management charges, allocation charges, and policy administration charges, also attract GST at 18%.
Definition: Life insurance riders are additional benefits you can add to your basic life insurance policy, like critical illness cover, accidental death benefit, or disability cover.
GST Impact: GST on riders like hospicare or critical illness riders is levied at 18% on the rider premium. Since these are considered pure risk covers, the entire premium paid for the rider is taxable at the standard GST rate.
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Here’s a simplified breakdown of how GST applies to life insurance premiums:
| Type of Life Insurance | GST Rate | How GST is Applied |
| Term Life Insurance | 18% | GST is charged on the entire premium. |
| Endowment/Traditional Plans | 18% | GST is charged only on the risk (insurance) portion of the premium. |
| Unit-Linked Insurance Plans (ULIPs) | 18% | GST is charged on the risk cover portion, as well as other charges (e.g., fund management). |
| Health and Rider Add-ons | 18% | GST is charged on the entire rider premium. |
The introduction of GST has made life insurance slightly more expensive due to the additional tax burden. For most term plans, endowment policies, and ULIPs, the overall premium has increased due to the 18% tax on the insurance portion. While the increase may not seem huge on smaller premiums, for higher-value policies, the extra tax can add a noticeable amount to your overall cost.
However, it’s important to note that despite the higher costs due to GST, the tax benefits on premiums under Section 80C and tax-free death benefits under Section 10(10D) remain intact. This means that while you may pay more upfront, life insurance still offers substantial financial and tax-saving benefits.
Knowing how GST affects your life insurance premium helps you budget more accurately and understand the total cost of your policy. It also helps you make informed decisions about the type of policy that fits your needs and financial situation.
For example, if your primary concern is low cost, you may prefer term insurance, where GST applies directly to a lower premium. On the other hand, if you are looking for savings and investment benefits along with life cover, you might opt for an endowment plan or ULIP, keeping in mind that GST will apply only to certain portions of the premium.
NRIs purchasing life insurance in India are subject to the same GST rates as residents, typically 18% on premiums. However, NRIs can benefit from an 18% GST waiver on life insurance premiums if they pay through an NRE account in foreign currency. This waiver helps lower premium costs significantly. To claim it, NRIs must provide proof of NRI status and international address. With additional discounts on annual payments, total savings on premiums can reach up to 23%, making Indian life insurance plans a cost-effective choice for NRIs.
GST has impacted the cost of life insurance premiums, increasing the overall expense for policyholders. The standard GST rate of 18% applies to most life insurance policies, but it is important to know that the tax is applied differently based on the type of insurance plan. While GST has made life insurance slightly more expensive, the core benefits of life insurance, such as providing financial security and tax exemptions, continue to make it a valuable investment for securing your family’s future. Before purchasing a life insurance policy, it's a good idea to factor in the GST cost and consult with a financial advisor to make the best choice for your needs.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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