Term plans or pure insurance plans attract a GST of 18% as it is the mortality premium and no amount is invested out of that
New Delhi: As there are different life insurance policies are available, the applicable goods and services tax (GST) on them also varies. Insurance companies always quote the premium exclusive of GST, which gets added at the time of buying the policy.
Term plans or pure insurance plans which are the cheapest, attract a GST of 18% as it is the mortality premium and no amount is invested out of that. For example, if your annual premium is Rs 10,000, then GST of Rs 1,800 will be applicable to that. If you buy any rider such as accidental death rider for additional payout in case of accidental death, you will have to pay 18% GST on the rider amount as well.
If you are buying a unit-linked insurance plan (ULIP) then 18% GST will be charged on the entire amount except the part of premium that goes towards investment. Ulip premium partly goes towards mortality charge for providing insurance cover and partly towards investment and various charges.
In the case of traditional endowment policies, which bundle insurance and savings, GST is levied at 4.5% on the first-year premium and 2.25% on premiums for subsequent years. So, out of an annual premium of Rs 20,000, Rs 900 will go towards GST in the first year and Rs 450 in subsequent years.
In case of insurance pension plans or annuities, where you pay a lump sum and receive an annuity in return, GST of 1.8% is applicable. In this case, if you pay a lump sum of Rs 5 lakh to get an annual income of Rs 40,000, the GST component of the purchase cost will be Rs 9,000.
GST is also charged on other investments. In mutual funds, it comes under the overall cap of expense ratios stipulated by Sebi. Mutual fund’s lower fund management cost reduces the effect of GST as the tax is charged as a percentage of the costs. Lower the costs, lower is the GST. National Pension System (NPS) also charges GST but it is a minuscule amount as the fund management fee is very less. After maturity of the NPS account, if you buy annuity, there is no GST deduction, unlike in insurance plans.