Different GST rates for different insurance policies; how is it calculated?

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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 was levies at 15%. Incidentally, there is no uniform GST rate for all insurance policies, as the rate and treatment differ based on the type of the policy and the policy year. Experts say the basic rationale is that these insurance schemes are different in nature and offered for different purposes, thus their GST rates differ.

“General insurance and other insurance-led products are complete protection-based schemes that offer services by insurance companies that increase the GST cost. Wherein when it comes to investment-led products such as endowment plans, the service offered by insurance companies is minimal which is why charge the approx 1/10 GST cost and the GST is not charged on the investment part,” Naval Goel, founder and CEO, PolicyX.com.

Here is a primer on how GST is calculated on your insurance policy:

Term insurance

If a basic premium of term insurance is Rs 15,000, then you need to pay additional Rs 2,700 towards GST. The fact that term plans constitute the only risk element in the premium value, the GST is levied at the rate of 18% on the total premium amount. Similarly, if you top up the plan with add-on covers such as critical illness or personal accident riders then apart from the additional premium, you will have to pay GST also on the premium charged.

Return of Premium Term Plans (TROP)

TROP is a sub-category of term insurance, which gives a policyholder total premium paid back on survival of the policy on maturity. Unlike 18% GST on term insurance, 4.5% GST is levied on TROP in the first year and 2.25% thereafter. Because premiums are returned, the GST treatment is different compared to pure term plans.

Unit Linked Insurance Plans or Ulips

Ulips offer insurance cover of at least 10 times the annual premium along with the risk cover. In these policies, GST is levied not on the full premium but is levied on various charges – premium allocation, policy administration, mortality and fund management charges — at the rate of 18%. “Ulip is a protection plus investment part wherein the insurance company’s role in servicing remains the lowest, therefore the GST cost reduces according to the service,” said Goel.

Traditional plans

GST does depend on the policy year for traditional policies. For example, for the first year, it is levied at 4.5% and 2.25% for every subsequent year in traditional policies.

Annuity plans

For single-premium annuity policies, GST is levied at 1.8%.

General insurance

Considering general insurance plans are pure protection plans, the rate of 18% is levied. The current GST on health insurance policies stands at 18%. Similarly, GST on motor insurance policies stands at 18% for both third-party and comprehensive plans. For riders, 18% GST applies separately.

Before investing do consider GST paid as it constitutes an important part of the total cost of your policy. Most importantly, GST amount paid on life insurance premiums also qualifies for an income tax deduction in the year of premium payment for taxpayers.