How Does GST Impact on Life Insurance?

Goods and Services Tax (GST) has streamlined India’s taxation system, impacting various sectors, including insurance. Introduced in 2017, GST replaced multiple indirect taxes, offering uniformity but also increasing costs for policyholders. The life insurance industry is significantly influenced by GST, affecting premiums, surrender values, and tax benefits. Understanding these changes helps individuals make informed decisions regarding their policies.

GST impact on life insurance premium

GST has increased the cost of life insurance premiums. Under GST, premiums attract an 18% tax, compared to the earlier service tax rate of 15%. For pure term insurance, the entire premium is taxable at this rate. For endowment and unit-linked policies, only a portion of the premium is taxed, depending on the policy's risk cover.

This increment may seem minor, but over the policy's tenure, it can result in a notable difference in total costs. While this impacts affordability for some, the comprehensive benefits offered by life insurance make it a crucial financial investment despite the GST implications.

GST impact on life insurance surrender value

GST also affects the surrender value of life insurance policies. The surrender value, which is the amount received by a policyholder upon cancelling a policy before maturity, is subject to an 18% GST.

Previously, surrender values were exempt from taxes in many cases, but GST has standardised this, leading to additional costs for policyholders opting to surrender their policies prematurely. This change has discouraged policy discontinuation and encouraged people to retain their policies, aligning with the long-term objective of life insurance to provide financial security.

How will GST affect insurance in future?

In the future, GST could continue to influence the affordability and accessibility of life insurance in India. If the GST rate remains unchanged at 18%, the higher costs could deter new buyers or reduce the coverage amount people opt for.

However, industry experts have called for GST reforms to lower the rates for life insurance, considering its importance for financial protection. A reduced GST rate or exemptions on certain types of policies could make insurance more attractive and accessible, boosting the sector’s growth while supporting the government’s financial inclusion goals.

Are life insurance premiums eligible for GST exemption?

Currently, life insurance premiums are not entirely exempt from GST. While policies such as group insurance or certain pension plans may receive partial exemptions, most life insurance premiums attract an 18% GST rate.

Policyholders can, however, benefit from income tax deductions on premiums paid under Section 80C of the Income Tax Act. Although this does not directly exempt GST, it offers a financial reprieve, encouraging individuals to continue investing in life insurance for long-term financial security.

Conclusion

The introduction of GST has reshaped the taxation of life insurance policies, impacting premiums, surrender values, and affordability. While the uniform tax system simplifies compliance, the higher rates have increased policy costs. To mitigate these effects, prospective reforms or rate reductions could help boost the life insurance sector, ensuring it remains accessible for India’s growing population.