GST on Insurance Premiums: Impact, Tax Savings, and Applicable Rates
August 5, 2024 8 Mins Read
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Table of Contents
Introduction to GST on Insurance
GST Rates on Insurance Premiums
Insurance Policies Exempt from GST
Impact of GST on Insurance Premiums
Tax Savings on GST Paid for Insurance
Latest Updates and News on GST for Insurance Premiums
Conclusion
Frequently Asked Questions
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:
Product Applicability GST Rate
Endowment Policy First Premium 4.50%
Endowment Policy Regular Premium 2.25%
Health Insurance Policy Premium Payable 18%
Riders Premium Payable or Accidental Death Benefit 18%
Single Premium Annuity Policy Premium Payable 1.80%
Term Policy Premium payable 18%
Unit-Linked Insurance Policy All applicable charges 18%
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:
Varishtha Pension Bima Yojana
Pradhan Mantri Jeevan Jyoti Bima Yojana
Life insurance provided by Central Government to members of the Army, Navy and Air Force.
Janashree Bima Yojana (JBY)
Aam Aadmi Bima Yojana (AABY)
Pradhan Mantri Vaya Vandan Yojana
Life micro-insurance product as approved by the Insurance Regulatory and Development Authority,
having maximum cover of Rs. 50,000
Pradhan Mantri Jan Dhan Yogana
Any other insurance scheme of the State Government as may be notified by Government of India on
the recommendation of GSTC.
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