How has GST affected life insurance plans in India?

People usually avail of life insurance plans to protect their family from financial adversities in the event of a mishap. But what is life insurance? Life insurance ensures that the family of the insured person gets the sum assured after in case of their untimely demise. In most cases, it also provides financial protection in case of permanent disability. However, with the introduction of GST, certain changes were observed in almost every sector. The insurance sector is no exception. Let’s take a look at the changes in life insurance plans due to GST implementation.

GST norms for life insurance plans

Since its announcement, the Goods and Services Tax, or GST, has been the subject of much debate in India. This is because almost every industry in the country has been influenced in some way by the implementation of GST and its associated rules. The rate of GST applicable on life insurance differs depending on the type of life insurance policy.

1)      Term insurance plans

Term insurance is a pure-protection plan that provides a huge sum assured at relatively low premiums. GST applicable on term insurance plans is 18% of the premiums payable.

2)      Unit Linked Insurance Plans (ULIPs)

Unit Linked Insurance Plans (ULIPs) are the products that offer twin benefits of insurance and savings. In the case of ULIPs, a certain portion of the premiums paid goes to provide life cover to the insured person while the remaining portion is invested in the underlying assets. On premiums paid in ULIPs, the GST rate applicable is 18%.

3)      Endowment plans

Endowment plans are those life insurance plans that provide a maturity benefit in addition to the death benefit. In other words, the sum assured is paid to the policyholder or their family in case of the demise of the insured person or at the maturity of the policy, in case the insured person survives the policy term.

The applicability of GST on endowment plans varies slightly as compared to other insurance plans. Here, the GST rate is 4.5% for the first-year premium followed by a 2.5% GST rate on premiums paid in the succeeding years.

GST vs. erstwhile service tax law

The implication of GST has changed the scenario of life insurance plans very much. The amount of premium that policyholders pay for a specific policy has increased. During the erstwhile service tax law, the tax applicable on insurance premiums was 15% that included basic service tax, Swachh Bharat Cess, and Krishi Kalyan Cess. With the implementation of GST, this rate became 18%.

Tax benefits of life insurance plans

There are many perks of having life insurance plans,andone of the important aspects is income tax benefits. The premiums paid are eligible for a tax deduction under section 80C of the Income Tax Act, 1961. As per Section 80C, you can claim the premiums paid on your life insurance plan as deductions from your gross total income up to Rs 1.5 lakh.

Apart from that, the maturity proceeds or the death benefit received is exempted from income tax under section 10(10D) of the act, if the premium is less than 10% of the sum assured for policies taken after 1 April 2012. The tax deductions you are eligible for vary depending on whether you’re following the old tax regime or the new one. It’s best to consult your financial advisor or insurer to clarify which tax benefits you will get.

Bottom Line

Implementation of GST has impacted all the sectors in India. While buying a policy, it is important to understand the tax implications of the premiums paid and maturity or death benefits received, whether it’s income tax or GST. When buying a life insurance plan, you can use thelife insurance premium calculator to know the exact amount of premiums that you will require to pay. This will ensure proper financial planning and help you get the best policy that suits your needs.