GST on insurance: Why Opposition leaders are demanding relief. Check tax rates, total premium amounts

GST on insurance: INDIA bloc parties, including MPs Trinamool Congress (TMC), Indian National Congress, Aam Aadmi Party (AAP), and Nationalist Congress Party (NCP-SC), organised a demonstration at the Parliament premises on Tuesday. The primary objective of the protest was to advocate for the reversal of the 18% Goods and Services Tax (GST) imposed on life and health insurance premiums. During the protest, members of Parliament gathered on the steps leading to the Makar Dwar of Parliament to voice their concerns and demand action on this issue.

Carrying placards reading "Tax terrorism", the protesting MPs raised slogans demanding that the GST on life and health insurance premiums be rolled back.

During the demonstration, the members of Parliament convened on the steps leading to the Makar Dwar of Parliament to express their concerns and press for concrete action on this matter. Even Leader of Opposition Rahul Gandhi and industry bodies have advocated for a rollback or reduction to ease the financial burden on individuals and families.
 
West Bengal CM Mamata Banerjee had already raised her concern on this issue. Even Union Minister Nitin Gadkari penned a letter to Finance Minister Nirmala Sitharaman, urging her to reconsider the application of GST on insurance premiums. He emphasized that the imposition of GST was tantamount to taxing the uncertainties of life and imposing constraints on the industry's expansion.

"Levying GST on life insurance premium amounts to levying tax on the uncertainties of life. The Union feels that the person who covers the risk of life's uncertainties to give some protection to the family should not be levied tax on the premium to purchase cover against this risk. Similarly, the 18% GST on medical insurance premium is proving to be a deterrent for the growth of this segment of business which is socially necessary," noted Gadkari in a letter addressed to Sitharaman.

The recommendation to reduce the GST rate on insurance products, specifically term and health insurance, has been suggested by both Gadkari and the Standing Committee on Finance, which is chaired by Jayant Sinha.

Current tax rates and premiums

GST is applicable on all insurance policies. Policyholders are required to pay GST on their insurance premiums as per the prevailing tax laws. The specific GST rates applicable vary depending on the type of insurance policy being purchased. Understanding how GST differs across these types of life insurance can help you assess the overall cost implications and choose a policy that aligns with your financial goals and preferences.

Product Type	Applicable on	GST rate
Term Policy	Premium payable	18%
Unit Linked Insurance Policy	All applicable charges	18%
Riders	Premium Payable i.e. Accidental Death Benefit Rider	18%
Health Insurance Policy	Premium Payable	18%
Endowment Policy	First Premium	4.50%
Endowment Policy	Premium Payable i.e. Regular Premium	2.25%
Single Premium Annuity Policy	Premium Payable	1.80%

GST on different types of life insurance policies

GST is applied to various types of life insurance policies at different rates. Understanding these rates can help you make informed decisions when choosing the right insurance policy.

Term Insurance Plans: The GST rate for term insurance plans is 18%. This rate is applied to the total premium amount of the policy.

Unit Linked Insurance Plans (ULIPs): ULIPs attract a GST rate of 18%. This rate is applicable to various charges associated with the policy, including fund management fees.

Endowment Plans: Endowment plans have a different GST structure. In the first year, these plans incur a GST rate of 4.5% on the premium amount. From the second year onwards, the GST rate decreases to 2.25%.

Single Premium Annuity Policies: For single premium annuity policies, a GST rate of 1.8% is applied to the lump sum payment made towards the policy.

Why MPs are asking for rate reduction

GST levied on insurance premiums has a direct influence on personal finances, particularly impacting the middle class. Elevated GST percentages escalate the expenses associated with insurance plans, rendering them less attainable for the individuals who rely on them the most.

The surge in insurance premiums can pose difficulties for families in upholding sufficient coverage. This predicament may result in financial fragility during unexpected medical crises or instances of income loss.

As per the Standing Committee on Finance report, the insurance penetration rate in India for 2021-22, indicated by the percentage of insurance premium to GDP, was recorded at 4.2%, notably lower than the global average of 7%. 

The report underscored the necessity to enhance public awareness regarding the importance and advantages of acquiring insurance coverage, along with expanding the range of available insurance products.

In the month of July 2024, the government's GST collection amounted to Rs 1.82 lakh crore, reflecting a year-on-year growth of 10.3%. This figure marks the third-highest monthly collection observed since the implementation of the GST regime seven years ago.

Centre's take

Amit Malviya, in-charge of BJP's information and technology department, has said: "Of the total collection of Rs 24,529 crore from health insurance (18%), half of it, i.e. Rs 12,264 crore, goes straight to the states (SGST 9%). It doesn't even come to the Centre. Of the Centre's share of collection, roughly 41% is devolved back to the States again as part of Tax Devolution as per Finance Commission's formula!"

On the demand to remove the 18% GST, he tweeted: "On cutting GST Rates, Govt of India alone can’t cut the GST rates on health insurance. That decision lies with the GST Council, where states hold 2/3rd power to bring changes."