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Life insurance serves as a fundamental component of financial planning, offering a safety net for families in times of need. However, the introduction of Goods and Services Tax (GST) has had a major impact on one of the important types of insurance i.e., called Life Insurance. GST includes the service tax applicable to the insurance industry, its introduction has led to an increase in premium amounts.
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However, GST has also been credited with several positive impacts on the life insurance sector. Let’s discuss the GST impact on life insurance policies:
Let us start by reminding ourselves of what GST is. GST, implemented on July 1, 2017, is an indirect tax levied on the supply of goods and services in India. It replaced a basket of taxes such as service tax, Value added tax (popularly known as VAT), and central excise duty. One important area affected by GST is the insurance sector , particularly life insurance premiums.
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Under GST, life insurance premiums are subject to tax due to the services rendered by insurance companies, including premium collection, claims processing, and risk coverage provision. The GST rate on life insurance premiums is determined by the Insurance Regulatory and Development Authority of India (IRDAI).
One of the influences of GST on life insurance plans that insurance buyers should keep in mind is that GST is applicable differently on different life insurance plans.
Term Insurance: Term insurance is the most economical type of life insurance. For this, GST applies at 18% standard rate on premium payments.
ULIPs (Unit Linked Insurance Plans): GST is charged at 18%. This includes the costs of GST for paying premiums as well as fund management charges.
Traditional Life Insurance Plans: For premiums of 1st year, GST is levied at 4.5% whereas for the coming years it is levied at 2.25%.
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GST levied on life insurance premiums has various implications for policyholders and insurers as follows :
Tax Levied: Under GST, the taxable event for life insurance occurs when the policyholder pays the premium. The insurance company, as the service provider, is responsible for paying GST on the premium collected.
GST Rates: The GST rate on life insurance premiums varies depending on the type of policy. For instance, term insurance policies generally attract an 18% GST, while other types such as endowment plans and ULIPs may have different rates.
Input Tax Credit (ITC): Insurance companies can claim input tax credit on the GST paid for their input services and procurements. However, ITC is not available for the GST paid on life insurance premium collection, meaning insurers cannot offset this tax against their other GST liabilities.
Tax Deductions for Policyholders:
Despite the fact tax is levied on life insurance premiums, policyholders can actually benefit from tax deductions under specific sections of the Income Tax Act,1961. Notably, section 80c allows for deductions on premiums paid for life insurance policies, with the maximum ceiling of Rs.1.5 Lakh per financial year. It is important to note that the total deduction under Section 80C includes other eligible investments such as PPF, EPF, and NSC, and taxpayers should consider all eligible investments to maximize the benefit.
Furthermore, Section 10(10D) provides tax exemptions on the proceeds received from life insurance policies, including maturity benefits, death benefits, and surrender value, subject to certain conditions. However, If these conditions are not fulfilled, the maturity proceeds may become taxable.
Enhanced Transparency and Compliance:
GST has streamlined the tax structure by consolidating the multiple indirect taxes into a single tax. This unification ensures greater transparency in tax calculations and promotes compliance among insurers and policyholders. The simplified tax structure reduces the likelihood of tax evasion and fosters a more efficient tax collection process.
Expansion of the Tax Base: GST on life insurance premiums has broadened the tax base by including previously untaxed transactions. This expansion contributes to increased government revenue, which can be utilized for developmental projects, infrastructure improvements, and social welfare programs.
Now that you understand the impact of GST on life insurance plans, it’s important to recognize that there is more to these plans than just pricing differences. For a reliable and beneficial life insurance plan for your family, consider term plans from Policybazaar. This term insurance plan offers comprehensive coverage, various payout options, and additional covers to increase your protection.
†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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