Being suitably insured is a must for every individual today, keeping the unpredictability of life in mind. Depending on your needs, you can go for an online term plan or other kinds of policies. However, while purchasing your policy, do pause to consider an oft-overlooked factor, namely the Goods and Services Tax (GST). How does GST impact insurance policies? Here is a closer look at the same.
GST Rates And What The Insurance Industry Feels About Them
You may already know what is a term plan and what its myriad benefits are. It is an affordable life insurance plan that is hugely popular in the Indian financial market. But still, the prevalence of life insurance in India is below par, and some hold the GST that is charged partly accountable. GST is levied at the rate of 18% on both term insurance and health insurance policies. Industry experts feel this is one of the core reasons behind the lower insurance penetration across the country.
The insurance industry has been seeking a reduction in the GST rates for a long time, particularly with the growing demand owing to the increased awareness of customers in the aftermath of the COVID-19 pandemic. It led to a spurt in life and health insurance demand as more people looked to secure their families financially from any future upheavals. Yet, the high premiums are sometimes a deterrent for buyers, with experts stating how most people avoid policy purchases due to this reason. The Confederation of General Insurance Agents’ Association of India has previously requested the Indian Government for a clear distinction between commercial policies and their individual counterparts at least. The critical factor is that premiums for commerce and industry-related policies receive an input tax credit. Yet, individual policies continue to charge higher premium amounts with GST rates of 18%. It directly affects consumers with budgetary constraints.
To put this into perspective, suppose you have a term insurance policy with an annual premium of Rs. 10,000. In this case, you will be paying Rs. 1,800 (18%) as GST. Moreover, if you choose an add-on or rider like accidental death or others, you will have to pay additional premiums and 18% more GST on the same. Therefore, the industry desires a reduction in rates since this will encourage more people to purchase life and health insurance for future financial security and peace of mind.
Life Insurance GST- Some Key Points To Understand
Life insurance premiums were earlier subjected to 15% in service taxes. This included the basic service tax, Krishi Kalyan Cess, and Swachh Bharat Cess. Yet, post GST implementation, it went up to 18%. This 3% increase has ultimately affected the final consumer, leading to an increase in their premium amounts. While GST has primarily impacted the industry with higher premiums, it has also helped foster an atmosphere of competitiveness, leading to price reductions by several insurers through lowering other policy-linked costs.
The key pointers worth noting here pertain to the fact that GST is differently applicable for varying life insurance types.
● Term insurance policies are subject to a rate of 18% on the premium payments.
● For ULIPs (Unit-Linked Insurance Plans), the GST rates on the various charges are 18%. This will not just cover the premium payment but also the fund management charge.
● For endowment plans, the GST rate is 4.5% for premiums in the first year, while it is 2.25% for the next few years of these policies.
How can you minimize the overall impact?
You can use available tax deductions to get benefits on your premiums and the GST that is paid on the same. For example, section 80C allows you to deduct up to Rs. 1.5 lakh on your total insurance premiums, which includes the GST. Suppose you have selected any critical illness or health-related rider with your policy. In that case, you can also get extra deductions on the premium payments under Section 80D (up to Rs. 25,000 for those below 60 and up to Rs. 50,000 for senior citizens). Naturally, this helps you get some benefits while lowering the impact of the GST rates on your premium payments.
Conclusion
You should closely examine the GST rates and how they affect your premium payments. At the same time, take steps to maximize your tax deductions alongside. While comparing insurance plans, compare premiums without the GST amount, which is the same everywhere. Hence, this will give you a better idea of the plan you should go for. Yet, do not let pricing or premium amounts be your only criterion for choosing term insurance or other forms of insurance. Evaluate aspects like the coverage, inclusions and exclusions, tenure, and overall benefits, before making a decision.
