Do you know how GST affects Life Insurance premiums? Learn more about the tax benefits and policy options that will make your liabilities decrease with our expert advice.
The Goods and Services Tax (GST), has had quite an impact on various sectors, including the insurance industry. The purpose was to have a unified tax system as a replacement for the multiple indirect taxes that created an administrative burden.
Life insurance premiums have also been impacted by GST. Let us know how GST has had a say in life insurance policies and how it impacts policyholders. We will discuss the tax benefits of life insurance premiums that can help you make a better future for yourself.
GST, or Goods and Services Tax, is a consumption tax that is levied on the supply of goods and services. It was quite a shift in the paradigm as a single tax replaced multiple taxes like excise duty, service tax, VAT, and others. The aim was to make the tax structure more comprehensible. It also reduced the compliance costs and now buyers and sellers didn't have to face the scope of multiple taxes that varied across states. The GST Council, a body comprising representatives from the Central Government and State Governments, takes care of the GST rates and policy decisions related to GST.
We have observed an increase in life insurance premiums with the introduction of GST. In the pre-GST era, life insurance premiums were subject to a service tax of about 15%. With the advent of GST, an 18% standard rate was applied to life insurance premiums. Such a change in the tax rate has directly impacted the cost of life insurance policies:
Term Insurance: Term insurance plans offer pure life cover and for them, GST is charged at a flat rate of 18% on the premium paid.
Endowment Plans: Endowment plans, on the other hand, offer a combination of life cover and savings. The GST rate is lower at 4.5% for the first-year premium and 2.25% for subsequent years.
Unit-Linked Insurance Plans (ULIPs): ULIPs invest a percentage of the premium in market-linked funds, and is also levied with GST. The GST is 18% on both premium payments and fund management charges.
Annuity Plans: Annuity plans are plans that pay out a steady income after retirement. GST at 1.8% of the single premium paid is applied to these plans.
The increased cost of life insurance premiums may seem like a letdown because of GST. However, policyholders can still take advantage of tax benefits under the Income Tax Act, 1961. These tax benefits can compensate for the cost of premiums and make life insurance an attractive investment.
Section 80C of the Income Tax Act: This section allows a deduction of up to Rs. 1.5 lakh on life insurance premiums. The GST component of the premium is also included in this deduction. Other investments, such as PPF, ELSS, and home loans, are also covered under this section.
Section 80D of the Income Tax Act : If your life insurance policy offers a health insurance rider, you could claim an extra tax deduction from Section 80D. Such a deduction will be liable only on the premium you paid for that health insurance rider.
The introduction of GST made life insurance premium costlier but the relief being that the profit so gained, weighs much lighter when compared. Simpler structure is one factor of tax since GST has seen away the complicated hustle of too many taxes around and there is much stiff competition which leaves the better opportunities for policy services to fall onto the pockets of the customers despite the slightly increasing premiums being quite compensated through benefits.
If you need guidance on planning your life insurance, we are here to help at JJ FinTax. Our experienced financial advisors will guide you on how to estimate your financial objectives and budget proficiently so you can buy the best life insurance for yourself. Schedule a free 15-minute call today!
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