On July 1st 2017 the most awaited and historic change to the Indian Taxation system was made with the introduction of the Goods and Services Tax (GST). So far, many speculations have been made regarding the effect of GST on day to day necessities as well as luxuries. This article discusses the effect of GST at a glance on the insurance premiums of Top 5 Insurance Plans. Prior to the introduction of GST a person had to pay Service Tax at 15% which also included Swacch Bharat and Krishi Kalyan Cess on your premium however post the introduction of GST, you have to pay 18% Goods and Services Tax. However, it is also noteworthy that you do not have to pay GST on the entire amount of premium but only that amount that provides coverage from risk.
For instance, if you have bought an insurance policy for 2 purposes namely, insurance and investment, only that part which provides life cover will be liable to be taxed under GST.
Let’s take a look on the impact GST will have on insurance premium based on different types of insurance policies:
Unit Linked Life Insurance Plans
In these plans the insurance part and the investment part are categorized clearly and GST will be levied only on the risk cover part. The investment part will not attract any taxation under GST.
In ULIPs, every month or quarter, these charges are commonly recuperated through liquidation of reserve units. Also, risk cover charges increase with an increase in age. Also, fund management charges increase with corpus.
Along these lines, it may not be as simple to evaluate the correct effect however, there is still a marginal increase since GST is 18% and Service Tax including cess was 15%.
Term Life Insurance Plans
Life Insurance plans only serve 1 purpose and that is risk cover and since GST will be levied on the part which goes towards risk cover hence, the entire premium will be taxed under GST. The service tax was levied at the rate of 15% however 18% GST will now be charged which leads to a 2.61% marginal increase in rate of taxation.
For Example: You have taken a life insurance policy whose annual insurance premium is ₹20,000. Under service tax you would have paid premium of ₹23,000 i.e. ₹20,000 + ₹3,000 (15% of ₹20,000). However under GST you’ll be paying ₹23,600 i.e. ₹20,000 + ₹23,600 (18% of ₹20,000), thereby, effective increment in the premium will be 2.61%.
Traditional Life Insurance plans – Recurring Premium
These plans serve a dual purpose i.e. both insurance as well as investment, however, GST will only be charged on the Insurance premium towards risk cover. But it is difficult to categorize between the insurance and investment portion in the entire premium and thus, the categorization is done in the following manner whereby the premium paid in 1st year is different than the premium paid in the subsequent years:
i) For the 1st Year, GST is charged on 25% of the insurance premium which is going to be 4.5% (25%x18%) which earlier used to be 3.75% under Service Tax.
ii) For the subsequent years, GST will be charged on 12.5% of the insurance premium which is going to be 2.25% (12.5%x18%) which earlier used to be 1.875% under Service Tax.
Traditional Life Insurance Plans - Single Premium
For single premium traditional life insurance plans, 18% GST is going to be levied on 10% of the annual premium paid.
For instance: ₹5 Lakhs is the base premium, then the GST amount to be paid is 1.8% i.e. (10% x18%) of the premium amount which comes to a total of ₹5.09 Lakhs however if the same was to be paid before July 1st under the Service Tax regime then a Service Tax would have been 1.5% i.e. (10%x15%) of the premium that is ₹5,07500, which shows a minimal increase of 0.30%.
Health Insurance, Motor and Travel Insurance
The Insurance premiums for Health, Travel and Motor insurance are pure risk cover plans just like Life Insurance. The premium for these insurance plans changes every year and this increase is a routine procedure and cannot be attributed to GST however if we assume that the base rate of annual premium remains the same, we’ll again see a 2.61% increase in premium due to GST as calculated for Term Insurance plans as GST will be levied on the entire premium.
Comments
0 comment