Different GST rates apply on your life insurance policies; check details

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From mortality to premium allocation charges there are many costs involved when it comes to insurance. But there is one more element which we often tend to overlook while buying an insurance policy. Do you know you also need to pay Goods and Services Tax (GST) while paying life insurance policies? Interestingly, there is not one GST rate for all types of life insurance policies, as the rate differs depending on the type of policy as well as policy year in certain cases. Here is a primer on how different rates are applicable on different policies, which you should keep in mind as it increases the cost of buying a policy.

Different GST rates on different life insurance policies

GST is an indirect tax that was implemented in the year 2017 with an aim to simplify the tax structure in India. Prior to this service tax used to levy at 15%.

Term insurance

On term policies, which are the cheapest type of insurance, GST is levied at 18%. So, if your annual premium for a term plan is Rs17,700, you pay Rs 15,000 for the basic coverage and Rs 2,700 towards GST. In case you opt for riders such as critical illness or personal accident covers then you will have to pay GST on the additional premium as well. “Life insurance term plans constitute only risk element in the premium value and therefore GST is levied at the rate of 18% on the total premium,” said Tarun Rustagi, chief financial officer, Canara HSBC OBC Life Insurance.

Unit Linked Insurance Plans or Ulips

Unlike term plans, Ulips are market-linked policies and have two components- investment and insurance. In these policies, GST is levied not on the full premium but only the amount deducted towards various charges. Hence, the GST is not levied on the money invested after deducting various costs. “In Unit Linked Insurance Plans the GST is levied on various charges deducted out of the premium or fund value at the rate of 18%,” said Rustagi.

Traditional Plans

Traditional plans charge GST based on the policy year. The first year has a higher rate compared with the subsequent years. “GST is at 4.5% for the first-year premium and 2.25% for every subsequent year in traditional policies. Hence, the GST does depend on the policy year for traditional policies,” said Amit Sharma, founder and CEO eExpedise Healthcare.

Do you get a tax deduction on GST paid?

One of the frequently asked questions amongst taxpayers is that whether income tax deduction on life insurance premium includes GST or not. Well. the tax deduction claimed on premiums is inclusive of the GST amount. For health insurance plans, these benefits may be claimed under Section 80D, while for ULIPs, term insurance and traditional policies, deductions are allowed under Section 80C.

“Under the Income-tax regulations, deduction of payment of life insurance premium is allowed under Section 80C of the Income Tax Act. The regulation of this section allows deduction of ‘any amount paid’ on life insurance premium as eligible for an income tax deduction. Therefore GST amount paid on life insurance premium also qualifies for an income tax deduction in the year of premium payment for individual taxpayers,” said Rustagi.