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How has GST impacted life insurance in India?
How has GST impacted life insurance in India?

Life insurance in India has come a long way since the past decade. Before that, life insurance was another tax saving and an investment instrument for people. In a country like India when you cannot rely on the government for social security and post-retirement, the life insurance can come to our rescue for life protection and financial security.

The Indian economy has never been so streamlined and focused that we have witnessed after the implementation of GST (Goods and service tax). GST is the single largest indirect tax which India has reformed since independence. The economists have carefully considered the impact of GST that India will have on its GDP.

The service sector in India is accounting about 60% of the GDP, and it will continue to go deep in the long run. Life insurance in India, being one of the largest service industries, will have a specific impact by the introduction of GST.

The insurance sector in India consists of 57 insurance companies, that includes 24 life insurance and 33 non-life insurance companies. The potential of life insurance in India is boundaryless as life insurance provides financial protection to the common man. In spite of that, the coverage of life insurance in India has limited, and it requires a boost to reach the 1.32 billion Indian audience.

What is GST?

GST is a single tax on the supply of goods and services in India, right from the manufacturer to the end consumer. It is one indirect tax for the entire nation. GST ensures that the indirect tax rate and structure are unified across the country. In other words, GST would make doing ease of business by having a neutral tax regime irrespective of the place of doing business in India.

The reduction of transactional costs of providing services have led to increasing competitiveness for the goods and service industry and the life insurance sector is no exception.

Insurance is a vital part of the Indian financial sector, and it had been affected by GST. There are four tax slabs, which are 5%, 12%, 18%, and 28% under GST regime. Insurance being service industry is taxed at 18%.

Impact of GST on life insurance

Earlier the service tax of 15% was imposed on the premium cost of the term insurance plans. However, with the implementation of GST on life insurance, the tax rate has risen to 18%.

Following are different types of life and health insurance policies that have affected with the implementation of GST.

Type of policy

Old rate

New GST rate

Term insurance

15%

18%

ULIPs

15%

18%

Motor insurance

15%

18%

Endowment policies (1st year)

3.75%

4.5%

Endowment policies (2nd year onwards)

1.88%

2.25%

Health insurance

15%

18%

 

For example,

Particulars

Old service tax

As per GST

Gross premium

2000

2000

Investment portion

1200

1200

Life insurance portion

800

800

Service tax @15% on 800

120

---

GST @18% ON 800

---

144

 

In the case of life insurance, the premium is broadly made of two components.

1) The cost of ensuring the death risk.

2) The investment made by the life insurance company that gives the policy benefits.

The tax is applicable on a portion of premium which represents the cost of ensuring death risk. Thus, the tax is different from policy to policy. For instance, in the case of a life insurance policy where there is no maturity benefit and the entire premium amount is utilised only for the death benefit, no tax applies to the premium amount. 

The GST on life insurance has increased the premium of term plans by 3%. In the case of endowment policies, the 3% increase is applicable on the premium that is the cost of death benefits.

Similar is the impact on the general insurance like health insurance, car insurance, and the other non-life insurance policies.

The revised service tax applies to both existing and new policyholders. The increase in premium taxed will be passed on to the policyholders. The insurers will face a higher amount of administrative costs due to the rise in the number of GST returns.

How does GST impact you as an investor?

The increased GST on life insurance will make you pay a little more than before.  However, the premium that you pay has increased just by 3%, which is on a tax rate. For instance, you have a life insurance policy worth rupees ten lakh, which is available at a premium of rupees 20,000. As per the old tax system, you would have paid rupees 23000 adding 15% service tax on your premium cost. Now as per GST the 15% is replaced by 18%, and you will be paying rupees 23600, that is an increase of rupees 300.

When it is about securing yours and your family’s life, is the change drastic and unaffordable? Not really. Right?

GST is beneficial for consumers, here is how.

•    The unified and straightforward tax system

•    Unified prices of goods and services throughout the country

•    Transparency in a taxation system

The fact is undeniable that GST on life insurance had made insurance premium a little expensive. However, due to an increase in premium for life insurance, one cannot ignore the importance of securing life and health. Knowing how much your premium is chargeable under GST according to your plan is important to build a sound financial map to secure your financial future.

Buying insurance will continue, provided that insurance companies have a right selling approach and a favourable direct taxation structure that can help. The future seems hopeful for the life insurance sector with timely changes in the regulative framework. Demographic factors such as young insurable population, growing awareness for the need of life cover and retirement planning will support the growth of life insurance in India. Insurance companies in India have made strenuous efforts to create financial awareness. We hope that GST does not impact the life insurance sector negatively and the industry gets the support and attention it deserves.

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GST on life insurance, GST on life insurance, Life Insurance in India, Life Insurance in India,

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