Are you surprised that the premium required for your insurance is somewhat higher than the amount shown initially? The extra amount you see comes from an additional tax called GST, or Goods and Services Tax.
When you buy a term life insurance plan, you never pay merely the basic premium. You also have to pay a small percentage as tax to the government. Though this may seem insignificant, it nonetheless is, and knowing how GST works on insurance will help you know where exactly you are paying. Many people don't bother about this part, but once you understand it, the whole process becomes comprehensible and straightforward.
What is GST on term insurance?
The GST is the tax collected by the government on most goods and services sold in India. It came to replace older taxes such as service tax, VAT, and excise duty for simplification.
When you're buying a term life insurance plan, you pay for a service- financial protection for your family. The insurance company adds GST on term insurance premium and then pays that amount to the government.
The current rate of GST levied on term insurance is 18%. This means that for every ₹100 you pay as your insurance premium, ₹18 goes to the government in the form of tax. So, if your annual premium is ₹10,000, you actually pay ₹11,800 in total. The base amount is for your policy, and the extra ₹1,800 is the GST.
Why does GST apply to Term Life Insurance?
Now, one may wonder, why is a tax levied on something meant to secure your family's future? The reason is simple: a term life insurance plan is a financial service, and all services are taxed under the GST law.
Up to 2017, before the implementation of GST, a service tax at the rate of 15% was charged on insurance premiums. When GST replaced service tax, the rate became 18%. Although this is seen as a small increase, it has given more transparency to the whole system of taxation. Presently, you can distinctly see the portion of the tax on your insurance premium statement.
How much do you actually pay as GST?
To keep it simple, you just need to add 18% to your base premium amount. That's the total GST you pay. Let's say your annual premium for a term life insurance plan is ₹5,000. After GST, it will cost ₹5,900. If it were ₹20,000, you'd pay ₹23,600 plus GST.
So, every time you pay your premium, the amount that is reflected includes both the base premium and the GST it. The insurer collects it from you and passes it on to the government-nothing hidden, nothing confusing.
Who Pays the GST — You or the Insurer?
You, the policyholder, pay it. Whenever you pay your insurance premium, the insurance company adds the GST and collects it from you. This will always be reflected on your receipt of payment or invoice for the premium. You'll always find the base premium and GST listed separately. The insurance company acts only as a collector; it doesn’t keep that tax. In other words, the GST goes directly to the government.
Does GST affect your policy every year?
Yes, it does, but only while your policy is active and you're paying premiums. If you have opted to pay premiums once per year, the GST is applied once a year. If you have opted for monthly or quarterly payments, the GST is added every time you pay. The rate is the same, 18%. However, if your premium amount changes with age or cover size, the amount of GST changes.
For example, if your premium goes up next year, the GST will increase too, because it's always calculated as a percentage of your base premium.
Can You Get Any Benefit or Refund for the GST Paid?
Unfortunately, you cannot get a refund of GST directly from your insurance. But there is another positive side. The total premium you pay, which includes GST, can be claimed as a tax deduction under Section 80C of the Income Tax Act.
This means if your annual premium is ₹ 11,800 (₹ 10,000 basic premium + ₹ 1,800 GST), the entire ₹ 11,800 can be claimed as a deduction up to ₹ 1.5 lakh. Yet, even though you pay for this GST, it helps to reduce your taxable income, so in real terms, the impact of the GST is much smaller. If you buy insurance for personal protection, you cannot claim GST credit, unlike in the case of businesses. However, the benefit of the Section 80C deduction is already quite good.
Does GST vary for different life insurance plans?
Yes, it can differ slightly depending on the type of plan you buy.
In the case of term life insurance plans, GST is a flat 18% of the total premium amount.
In the case of other life insurance types, like endowment plans or ULIPs, the rate is different. For instance, some charge a lower rate in the second year or charge GST on only some charges. But the beauty of a term life insurance policy is its simplicity- a straight 18% GST on whatever premium you pay, without any complicated breakdowns.
How GST Impacts the Cost of Your Term Plan
It is easy to think that GST makes your policy expensive, but that is not really true. Term plans are already very affordable. In fact, even after adding 18% GST, the total cost remains low as compared to other insurance types.
For instance, a 30-year-old buying a term plan with ₹1 crore cover for 30 years can expect to pay an annual premium of ₹10,000-₹12,000. After adding GST, it would work out to ₹11,800 - ₹14,160 approximately. So, the actual difference is just a few hundred rupees a month-a small amount to pay for long-term peace of mind.
Tips to Manage GST Impact on Your Premium
Even though GST is fixed, you can reduce your total cost in smart ways:
Compare different insurers: premiums vary between companies. If you choose one with a lower base premium, you'll pay less GST, too.
Go for longer policy terms. You lock your premium for 30 or 40 years, which means even as you age, your cost remains stable.
Pay annually rather than monthly. Annual payments are often more convenient and may come with small savings.
Use your tax deductions wisely. Remember, the total premium, which includes GST, is claimed under Section 80C.
Choose only useful riders: Extra riders, like accidental or critical illness benefits, also attract GST. So pick them only if you really need them.
These small steps can lead to managing your overall insurance cost while still staying well-protected.
Example in Simple Words
Let me explain it with a quick example. Imagine that you have bought a 30-year term life insurance with a cover of ₹1 crore. The base premium is ₹12,000 per year. The insurance company charges 18% GST on this, which comes to ₹2,160.
So, your total amount to be paid is ₹14,160 for the year. Now, if you add a small rider for extra benefits, let's say it costs ₹500, then your base premium will be ₹12,500, and GST will be ₹2,250. It implies that your total premium will be ₹14,750 per year.
Simple calculation, isn't it? It is as simple as that to be very clear about how much you will pay.
Conclusion
Grasping the concept of GST on term insurance doesn’t really sound like a fun thing to do, but it’s actually a big part of being a wise policyholder. It lets you see the exact point where your money is going, and there are no unexpected events when it’s time to pay.
The 18% GST could be interpreted as an additional cost, but if you take a moment to consider the financial security that your family will have because of a term life insurance plan, it’s really just a small token of comfort.
Therefore, when you revisit your premium bill the following time, you will be aware that the little extra amount you are paying is the government's portion and not a hidden charge.
Supriyo Khan
Supriyo Khan
Supriyo Khan
Supriyo Khan
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