Are you aware that the Goods and Services Tax (GST), introduced in India in 2017, marked a transformative shift in the country's taxation landscape? Before GST took effect, service tax on insurance premiums was set at 15%. With GST, this rate jumped to 18%, directly impacting the cost of insurance policies.
While its primary intent was to unify indirect taxes and streamline compliance, its ripple effects have been felt across various sectors, including insurance.
The imposition of GST on insurance premiums has added another layer of cost consideration for policyholders. This article delves into how GST impacts insurance premiums, explores policy types and exemptions, and unravels potential tax-saving opportunities for individuals.
GST rate on insurance policies
GST rates on insurance premiums vary depending on the type of policy, generally falling under the standard rate of 18%. Before GST's introduction, insurance premiums were subject to service tax at 15%, inclusive of cess. The shift to GST led to an effective increase of 3% in taxation, which, though seemingly minor, can significantly impact long-term policies like life insurance or health insurance.
The applicability of GST extends across a wide spectrum of insurance products:
· Life insurance policies: Premiums paid towards term insurance, ULIPs, and traditional policies are subject to GST, albeit with certain nuances.
· Health insurance policies: Comprehensive health insurance plans, including family floater and senior citizen policies, attract an 18% GST rate.
· General insurance policies: Motor, travel, and home insurance premiums also come under the ambit of GST, making these mandatory policies slightly more expensive
How does GST differ based on insurance type?
The GST framework for insurance is not uniform; its application varies depending on the nature and structure of the policy.
1. Life insurance:
o GST is charged on the full premium amount for pure protection policies like term insurance.
o In the case of savings-linked policies or ULIPs, GST is levied only on the risk component of the premium, reducing the overall tax burden.
o For single-premium policies, GST applies to 10% of the total premium, while for annuity plans, it applies to only 1/10th of the premium value.
2. Health insurance:
o The GST rate on health insurance premiums remains constant across individual, family, and group plans.
o Policies with riders, such as critical illness coverage or maternity benefits, include GST on the additional rider premium as well.
3. General insurance:
o Motor insurance policies, mandatory for vehicle owners, experience the direct impact of GST, with both third-party and comprehensive plans taxed at 18%.
o Travel insurance premiums, especially for overseas coverage, attract GST, though certain policies bundled with air tickets may have exemptions.
4. Endowment Policy
o Endowment policies combine savings with life cover, and GST is applied differently depending on the structure of the premium.
o Endowment plans have different GST rates and structures. The GST rate is 4.5% on the first year's premiums, but 2.25% on future premiums beginning in the second year.
Which insurance policies are exempt from GST?
While most insurance products attract GST, a few are exempted under specific conditions:
· Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): This government-backed life insurance scheme, aimed at providing affordable protection, is fully exempt from GST.
· Pradhan Mantri Suraksha Bima Yojana (PMSBY): Accident insurance under this scheme is also GST-free, ensuring greater affordability for economically weaker sections.
· Rural and Social Sector Policies: Insurance products made for marginalised communities often enjoy GST exemptions to encourage uptake.
These exemptions highlight the government’s commitment to enhancing financial inclusion and making insurance accessible to all regions.
Tax savings on GST paid for insurance
While GST inflates premium costs, strategic planning can help policyholders mitigate the financial burden through tax-saving benefits.
1. Section 80C and Section 10(10D):
o Premiums paid for life insurance policies are eligible for deductions under Section 80C of the Income Tax Act, up to a limit of ₹1.5 lakh annually.
o Maturity proceeds and death benefits under Section 10(10D) are exempt from tax, provided the conditions of the policy are met.
2. Section 80D:
o Health insurance premiums, including GST, qualify for tax deductions under Section 80D.
o The deduction limit extends up to ₹25,000 for individuals below 60 years and ₹50,000 for senior citizens, encompassing policies purchased for self, spouse, parents, or dependent children.
3. Business Expense Claims:
o For businesses, GST paid on group health insurance or employee benefit policies can be claimed as an input tax credit (ITC), reducing the overall GST liability.
Understanding these provisions empowers policyholders to navigate the dual impact of GST and tax regulations effectively.
Summing Up
The implementation of GST has undeniably increased the cost of insurance premiums, affecting their affordability. However, individuals can hurdle through the financial strain and ensure adequate coverage by providing exemptions and tax-saving provisions. The application of GST across policy types also highlights the importance of informed decision-making when choosing insurance products.
If you're looking for insurance policies that are easy on your pocket, you might want to check out the insurance offered by Generali Central and protect your health, despite the taxes.
FAQs
1. Does GST apply to all insurance policies?
No, certain policies like PMJJBY and PMSBY are exempt from GST.
2. Can businesses claim input tax credit (ITC) on insurance premiums?
Yes, businesses can claim ITC on group health insurance premiums paid for employees, provided they comply with GST regulations.
3. Are there any tax benefits for GST paid on insurance?
Yes, the GST component on premiums is included in tax deduction limits under Sections 80C and 80D of the Income Tax Act.
4. How has GST impacted the cost of life insurance?
The GST rate of 18% has increased the cost of life insurance premiums compared to the pre-GST era, where the service tax rate was 15%.
5. Are single-premium policies taxed differently under GST?
Yes, GST on single-premium policies applies only to 10% of the total premium, reducing the effective tax burden.
