GST on Insurance Premiums: Impact, Tax Savings, and Applicable Rates

Introduction to GST on Insurance

Before Goods and Services Tax (GST) was introduced, India had numerous indirect taxes, including Service Tax, Central Excise Duty, Additional Duties of Customs, Cess, and State Value Added Tax. Insurance policies, classified as services, transitioned to GST when it replaced these service taxes. The GST rates on insurance policies now vary based on the type of policy and adhere to the current tax laws. 

GST Rates on Insurance Premiums

As discussed, GST rates on insurance vary on the type of policy. Here is a brief overview: 

Now let us understand these in detail: 

GST on Life Insurance & General Insurance Premiums

There are three main types of life insurance policies: term insurance plans, ULIPs (Unit Linked Insurance Plans), and endowment plans (including money-back policies), each with different GST rates on premiums.

GST on Term Insurance Plans

• GST Rate: 18% on the total premium amount.
• Term insurance plans provide coverage for a specific term. If the policyholder dies during this period, the death benefit is paid to the nominee.

GST on Unit Linked Insurance Plans (ULIPs)

• GST Rate: 18% on the total premium amount, including fund management charges.
• ULIPs combine life insurance with investment options, offering both a death benefit and potential returns based on investment performance.

GST on Endowment Plans

• GST Rate: 4.5% on the first-year premium and 2.25% from the second year onwards.
• Endowment plans offer life coverage along with a savings component, providing a lump sum on maturity or death, with potential periodic payouts.

GST on General Insurance Premiums

The GST rate on general insurance is 18%. General insurance includes various types of policies, each providing coverage for specific risks:

• Fire Insurance: Covers damage or loss caused by fire to property and assets.
• Car Insurance: Provides coverage for damages to vehicles and liabilities arising from accidents.
• Theft Insurance: Covers losses resulting from theft or burglary of insured property.
• Marine Insurance: Protects against loss or damage to ships, cargo, and other maritime interests.

For policyholders, the premium for general insurance increased from 15% to 18% due to GST. Corporate policyholders can still enjoy input tax credit on their general insurance policies, as they did under the previous service tax system.

However, individuals with life and health insurance do not receive input tax credit, as these policies are for personal use. Even corporate policyholders with group life and health insurance for their employees are not eligible for input tax credit.

Note: The GST rates mentioned above are subject to change based on government notifications. It’s essential to check the latest updates for accurate information.

Understand GST on No Claim Bonus

There is no GST on No Claim Bonus (NCB). This decision was clarified in the 48th GST Council meeting and detailed in Circular No. 186/18/2022-GST issued by the CBIC.

Insurance companies offer a No Claim Bonus as a reward or discount at the time of policy renewal when no claims have been made during the insurance period. This bonus is deducted from the premium amount to be paid.

According to the Circular, policyholders purchase insurance to protect themselves from potential loss or injury, and there is no contractual obligation for them to avoid making claims. Not making a claim is not considered a service to the insurance company.

Under Section 15(3)(a) of the CGST Act, the value of supply excludes any discount given before or at the time of supply if it is recorded on the invoice. Therefore, the No Claim Bonus is treated as a discount, and no GST is applicable on it.

Insurance Policies Exempt from GST

Here is a list of Insurance policies exempt from GST:

Impact of GST on Insurance Premiums

The introduction of GST on July 1, 2017, increased premiums for both pre-GST and new policyholders due to the rise in tax rates from 15% to 18%. Insurers passed these additional costs onto consumers, leading to higher premiums for health, life, and car insurance. 

The insurance sector, along with the banking sector, became more expensive as a result. Additionally, insurers faced higher compliance and administrative expenses due to more frequent GST returns, complicating the taxability of inter-branch services.

Tax Savings on GST Paid for Insurance

• GST has increased premium amounts for life insurance plans, but there are deductions to help save on income tax.
• Deductions allow you to claim tax benefits on premiums paid for life insurance, including GST on those premiums.
• Popular deductions for life insurance premiums are available under Section 80C and Section 80D of the Income Tax Act, 1961.
• Section 80C: Claim deductions of up to ₹1.5 lakh annually on total insurance premiums, including GST.
• Section 80D: Further deductions on premiums if a medical rider is included with your life insurance policy.
• GST paid on life insurance premiums is eligible for tax benefits under Section 80C, with a deduction limit of ₹1.5 lakh per annum.
• GST paid on health insurance premiums is eligible for deduction under Section 80D, with a maximum claim of ₹1 lakh per annum for policies for yourself, spouse, children, and parents.
• Car insurance and home insurance policies do not offer tax benefits under the Income Tax Act, 1961, and are not eligible for the same deductions as life and health insurance policies.

Latest Updates and News on GST for Insurance Premiums

In a significant move, the GST Council provided substantial relief to the general insurance industry during its 53rd meeting. The Council decided to drop GST demands amounting to over ₹18,000 crores, addressing several long-standing issues and easing the financial burden on insurers.

This decision resolves previous show cause and demand notices issued to insurance companies for not paying GST from July 2017 to March 2022. These notices were related to the non-payment of GST on co-insurance premiums and reinsurance commissions. With the new directive, the GST Council has categorized these transactions as “no supply” under Schedule III of the CGST Act, eliminating the need for GST on these amounts and nullifying past demands.

Additionally, the Council addressed concerns about GST on reinsurance premiums for crop insurance. While GST on government schemes for farmers has been exempt since July 2017, reinsurance premiums were only exempt from January 2018. The Council proposed an exemption for the interim period, further relieving the industry.

This decision is a result of persistent advocacy by the General Insurance Council, which highlighted the legal issues and adverse effects of these tax demands. The relief measures represent a major milestone for the industry, promoting a more stable and equitable environment for insurers and ensuring that the benefits of insurance reach consumers without excessive tax burdens.

Related Read: 

• GST Rates on Mobile Phones
• GST on Food
• GST on Rent

Conclusion

The updates on GST rates and their impact on insurance premiums highlight significant changes and relief for the insurance industry. While GST initially led to higher premiums and increased costs, recent decisions by the GST Council have alleviated some burdens. By addressing issues and clarifying GST applicability, the Council has provided much-needed relief to insurers and consumers. This progress underscores the importance of continued advocacy and regulatory adjustments to support industry stability and consumer benefits.

Frequently Asked Questions

Is GST payable on the premium of all my Insurance Policies?

GST is applicable on most insurance premiums, with rates varying by policy type.

Is GST in addition to the existing taxes I am paying on my Insurance Policies?

GST has replaced previous indirect taxes on insurance policies, so it is not in addition to them.

If I pay my premium in advance, will GST still apply to me?

Yes, GST applies to the premium amount, regardless of whether it is paid in advance.

Is GST applicable on vehicle insurance?

Yes, GST is applicable on vehicle insurance premiums at a rate of 18%.

Can GST on insurance premiums be claimed under Section 80C?

Yes, GST on life insurance premiums can be claimed under Section 80C, subject to limits.

How does GST affect the cost of insurance?

GST has increased insurance premiums by raising the tax rate from 15% to 18%.

How is GST handled for multi-year insurance policies?

GST is applied to each year’s premium and not spread across the policy’s entire term.

Is there a GST on travel insurance premiums?

Yes, GST is applicable on travel insurance premiums at 18%.