How GST affects your Insurance Premium?

Good and Services tax (GST) came into force on July 1, 2017. Let’s look at the impact introduction of GST will have on your insurance premium. Before the introduction of GST you had to pay Service Tax at 15% (including Swacch Bharat and Krishi Kalyan Cess) on your insurance premium.

From July 1 onwards, you will have to pay GST at 18%. Here are a few things that you must know.

You may not have to pay GST on the entire premium

You do have to pay GST (or service tax earlier) on the entire insurance premium.

GST (or earlier Service tax) is charged only on the portion of the insurance premium that goes towards providing the risk cover.

Therefore, if you have purchased an insurance plan for the dual purpose of insurance and investment, only the portion of the premium that goes towards providing life cover (known as mortality charge) shall be subject to GST. By the way, the treatment was similar during service tax regime too.

Let’s look at the impact of GST on your insurance premium.

#1 Term Life Insurance Plans

Since term life insurance plans are pure risk cover and do not have any investment component, GST will be charged on the entire premium.

Earlier the service tax was charged at 15%. Now GST will be charged at 18%. This will result in marginal increase of 2.61% in your life insurance premium.

For instance, if your base annual insurance premium is Rs 10,000, you would have paid premium of Rs 11,500 (Rs 10,000 + 15% service tax) under service tax regime. Now you will have to pay Rs 11,800 (Rs 10,000 +18% GST).

Effective increase in the premium will be 2.61%.

#2 Health Insurance, Motor and Travel Insurance

Do note that the premium for Health Insurance, Motor Insurance and Travel Insurance policies changes every year. For instance, Health Insurance increases every year with age. Clearly, GST has no role to play for such increase in the annual premium.

However, assuming the base annual premium stayed constant, there will still be minor increase of 2.61% in insurance premium due to GST. Like term life insurance, these are pure risk cover plans.

#3 Traditional Life Insurance Plans

Traditional Life Insurance Plans have both insurance and investment component. GST is to be charged only on the insurance premium.

Now, Traditional Life Insurance Plans are so opaque that it is difficult to bifurcate insurance and investment portions in the insurance premium. The convention followed is:

1. For the first year premium, you have to pay GST (earlier service tax) on 25% of the premium. In the first year, you will pay GST at 4.5% (25% * 18%). Earlier, you had to pay service tax at 3.75% (25% * 18%) of the annual premium.
2. For the subsequent years, you have to pay GST (earlier service tax) on 12.5% of the annual premium. In the first year, you will pay GST at 2.25% (12.5% * 18%). Earlier, you had to pay service tax at 1.875% (12.5% * 18%) of the annual premium.

If your base annual premium (before taxes) was Rs 1 lac,

In the first year, you would have paid Rs 103,750 (under service tax regime). Under GST regime, you will have to pay Rs 104,500. An effective increase of 0.72%.

For renewal premiums (subsequent years), you will have to pay Rs 102,250 (instead of Rs 101,875). An increase of 0.37%.

#4 Single Premium Traditional Life Insurance Plans

With these plans, 10% of the premium is chargeable to GST (earlier service tax).

If the base premium was Rs 10 lacs, you will have to pay GST at 1.8% (10% * 18%) of the premium amount. Therefore, your premium will be Rs 10.18 lacs.

Under service tax regime, it would have been Rs 10.15 lacs.

Increase of 0.30%

#5 Unit Linked Life Insurance Plans

In ULIPs, investment part and insurance part (mortality charges) are clearly segregated. GST will be charged only on the mortality charges or any other charges as levied by the insurance company. Such other charges may include premium allocation charges, fund management charges administrative charges etc.

No GST shall be charged on the investment component.

In ULIPs, these charges are typically recovered through liquidation of fund units every month or quarter. Moreover, mortality charges increase with age. Fund management charges increase with your corpus. Therefore, it may not be as easy to assess the exact impact.

However, the increase will be marginal since all the charges that are now subject to 18% GST were subject to 15% service tax (including cess).

Impact of GST on Insurance Premium