As the countdown to the impending implementation of Goods and Services Tax (GST) ended with the Prime Minister Narendra Modi officially launching the same on July 1 2017, the masses including the business enterprises and the common man of India are looking at the changes that the new indirect tax reform is set to bring in India’s economy. One important segment of the economy is personal finance covering a host of products, including insurance. The GST impact on insurance policyholders is likely to be significant in terms of premium payment. Among the rates-5%, 12%, 18% and 28%, as specified by the GST council, the insurance premium will attract 18% rate in place of the existing 15% service tax. But its applicability is not as simple as written.
Tax Incidence on Life Insurance Policies Post GST
At the moment, the prospective policyholders can subscribe to three types of life insurance policies-namely term insurance, endowment and ULIP. Previously, the service tax applicability was different among these policies. The premiums, which you pay in life insurance policies, cover two portions- savings and risk coverage. The service tax was applied only to the risk portion and not the savings. But after the introduction of GST, the tax applicability on insurance policies will differ. See how they would pan out in the pointers below.
- If the payment of the entire premium is only towards the risk coverage, the entire 18% will be levied on the full amount of premium. For example-if the premium of a plan happens to be ₹5,000. The tax incidence, as per GST, will be 18% of ₹5,000 i.e. ₹900, which in the pre-GST era was at a lower value of 750. The pre-GST and post GST premium will thus be ₹5,750 and 5,900, respectively.
- In case of insurance policies with a single annuity premium, 10% of the single premium will be debited from the account of policyholders.
- In other cases, the GST will be applicable at 18% on the 25% of the premium amount in the first year. The following years will see a 18% GST on the 12.5% portion of the premium in the following years. So, if the premium for first year amounts to ₹6,000, the 18% tax on ₹1,500 (25% of 6,000)=₹270 will be debited instead of 15% on ₹1,500 i.e. ₹225.
The same 18% rate will be applicable to both health and auto insurance premiums. From the set of information, it can be said that the premiums are likely to rise as soon as GST comes into effect.