Do you know how GST is applied to your health and life insurance policies?

The Goods and Services Tax (GST), introduced in India in 2017, revolutionised the tax structure by merging multiple indirect taxes into a single tax regime. The new tax rate was levied on the vast range of goods and services but what has caught attention lately is the imposition of GST on life and health insurance policies, which previously had a service tax rate of 15%.

The debate on GST on health and life insurance premiums first made headlines after transport minister Nitin Gadkari wrote a letter to Finance Minister Nirmala Sitharaman asking her to remove the high GST rate as it leads to levying taxes on the uncertainties of life and restricts the sector’s growth. “You are requested to consider the suggestion of withdrawal of GST on life and medical insurance premium on priority as it becomes cumbersome for the senior citizens,” Gadkari said in his letter.

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The letter was a response to the Nagpur Divisional Life Insurance Corporation Employees Union, which submitted a memorandum to the transport minister highlighting concerns about the problems faced by the insurance industry. “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,” Gadkari's letter mentioned.

Nirmala Sitharaman on August 7 said taxes on insurance premiums were in place prior to the implementation of GST. The pre-GST tax on medical insurance was a longstanding issue across all states. It is important to note that this is not a recent development but rather a historical practice. In light of recent protests, it raises the question of whether those advocating for change have actively addressed the removal of this tax within their respective states, Sitharaman said.

While the fate of GST on your insurance policies is still under debate here is a primer on how GST rates are currently applicable on your health and life insurance policies. The comparison reveals that GST is only levied on the risk element and not the investment part. Here are details:   

Health Insurance: Health insurance policies attract an 18% GST on the total premium paid. This is straightforward, as the full premium amount is subject to this rate.

Term Insurance: Term insurance policies, often considered the most economical form of insurance, also incur an 18% GST on the premium. Additional riders such as critical illness or personal accident covers will also attract GST on their specific premiums. The GST is levied on the full amount as term plans constitute only risk element in the premium value and therefore GST is levied at the rate of 18% on the total premium.

Traditional Plans: Traditional life insurance plans have a tiered GST structure based on the policy year. The first year attracts a GST rate of 4.5%, while subsequent years attract a rate of 2.25%. 

Unit Linked Insurance Plans (ULIPs): ULIPs, which combine insurance and investment, have a different GST structure. In Unit Linked Insurance Plans, the GST is levied on mortality and other charges component at the rate of 18%. The amount invested in the market is after deducting GST charges. 

Importantly, under the Income Tax Act, the GST amount is included in the eligible deduction under Section 80C for life insurance and Section 80D for health insurance. Understanding these GST nuances can help policyholders make informed decisions about their life insurance investments and avail the maximum tax benefits.