All About GST on Insurance

An 18% GST on insurance premium is seen as a limitation, as it discourages many people from insuring in the first place. The high GST imposition increases the premium, and hence people may not tend to insure themselves.

Although the 55th Meeting of the GST Council recommended that GST be exempted from third-party motor and voucher transactions, it did not affect GST on health and life insurance. A high GST rate persists, which makes many Indians avoid buying health and life insurance, ignoring the major risks.

Let’s understand how GST on insurance policy is levied, how it is calculated and which insurance policies have a higher GST.

Understanding GST on Insurance

Current GST on insurance premium

Previously, before 2015, GST applicable on insurance premiums was 15%, which later increased to 18%. The increase has impacted the insurance premium claim, making fewer people interested in buying the claim. According to a news source, almost 30% of Indians are living without any health insurance.

The high insurance GST rate is a factor behind low insurance penetration, making India rank much lower among other nations. However, you can claim tax benefits on GST as per Section 80C Income Tax Act. Previously, you could claim only ₹1 lakh, which was later increased to ₹1.5 lakhs.

Benefits of charging GST on insurance policy

The imposition of GST rate on insurance premium has manifold benefits, which are:

• Better revenue for the government: The government accumulates a larger revenue margin with the accreditation of GST, which is needed to fund the operations of government-funded medical facilities.
• Improved government medical facilities: Because of higher medical inflation, there is a huge demand for government-supported medical facilities. GST application on insurance policy provides the government with better revenue collection, which further promotes state-funded healthcare facilities.
• Insight on insurance penetration: GST has made tax payment more convenient and systematized, which also helps regulatory bodies such as IRDAI to understand how many businesses are insured. IRDAI also can understand insurance penetration rates better by having a comprehensive database of insured pupils.

GST Rate on Insurance Premium

General Insurance

In the case of general insurance, the corporate business owners cannot claim input tax credit on the insurance. But the good thing is that the Government of India also provides a few life insurance policies on which GST tax does not apply. Here are a few to mention:

1. Janashree Bima Yojana (JBY):

GST does not apply in the case of JBY as the objective of the policy is to protect various blue-collar workers because of their low-income resources.

2. Pradhan Mantri Jeevan Jyoti BimaYojana:

Another life insurance by the Indian Government in case of death, this policy is exempted clearly of GST. The premium payable is much lower, with insurance cover of a total of ₹2 lakh.

3. Aam Aadmi Bima Yojana (AABY):

This policy aimed at providing insurance support to unorganized people and rural landless people, is also exempted from GST.

Life and Health Insurance

In life and health insurance, GST on insurance is imposed on the main three types of insurance policies. These are - Term Insurance Plans, Life Insurance Annuity Plans, Endowments and Unit Linked Insurance Plans (ULIP). The insurance GST rate on each of them is described below:

• LIC Term Insurance Plan - 18%
• Endowments and Pension Plan - 4.5% and 2.25% from second year
• Life Insurance Annuity Plan - 1.8%
• Unit Linked Insurance Plan - 18%

No Claim Bonus

When the insured doesn't claim insurance during the policy coverage period, the insurer claims a bonus on the insurance premium known as the No Claim Bonus (NCB). The question of whether GST on insurance premium for NCB is leviable or not needs to be answered.

NCB is classified more as a deduction based on the unclaimed insurance premium, and it is not a value supplied by the insured to the insurance provider. This makes GST not applicable on NCB, as NCB is not a supply where GST can be levied.

Another reason for not applying GST on NCB is that Section 15 of the CGST Act, 2017 mandates that supply will not include a discount for the calculation of GST. Because NCB is disclosed previously and cannot be treated as a supply, GST on an insurance policy is applied only to the final insurance premium after NCB is deducted.

Impact of GST on Insurance Policy Costs

The direct impact of GST on insurance premium increases the overall premium cost, making the policy have a higher overall premium. Apart from a few government-supported insurance policies, the imposition of GST always tends to inflate the annual premium. Here is a table identifying all the GST rates charged on various insurance policies:

How to Calculate GST on Insurance Premium?

Here is a step-by-step process of calculating GST on insurance premiums without undergoing any complex process:

• Step 1: First determine the policy type, as the type of policy determines the rate of GST applicable. Different insurance policies have varied rates of taxation, so it is important to first determine the insurance policy type. Health insurance attracts a GST levy of 18%, while an endowment policy has a GST of 4.50% in the first year.
• Step 2: Check if the policy is government-supported insurance, as in that case, GST will be exempted completely. Government-aided insurance policies such as Varishtha Pension Bima Yojana, Aam Aadmi Bima Yojana don’t have any GST on insurance.
• Step 3: Check for the annual premium you are required to pay. Most of the insurance policies have a GST levied on the premium.
• Step 4: Use a GST calculator to instantly get the GST amount payable. To avoid any complexity, you can use online calculators such as Coverbiz GST calculator which instantly calculates the applicable GST.
• Step 5: Add the GST amount to the principal amount of the premium, and you will get the full value of the premium you have to pay.

For example, your business has purchased a group health insurance policy for the team, whereby the annual premium is ₹2 lakhs. If the GST imposed is 18% of the total premium, then you have to pay ₹36,000 per annum. The total insurance premium your business needs to pay annually is thus:

Total premium value = Annual premium + GST imposed = 2,00,000 + 36,000 = ₹2,36,000.

Conclusion

Time to wrap it up, and by now you have got all the crucial things about GST on insurance policies. From the current GST rate applicable on insurance to GST charges in every type of policy, this blog has covered everything for you.

GST has indeed increased the overall pricing of insurance premiums, but it has also made insurers create more features to encourage people to take up insurance. However, in cases such as health insurance, you can claim tax benefits under Section 80D of the Income Tax Act.

Not every insurance policy has the benefit of tax deduction though, you need to keep a close check on the items covered under tax deduction.