The most awaited and widely discussed modification to the Indian indirect tax structure became a reality on July 1, 2017. The Goods and Services Tax (GST) was implemented and all other indirect taxes like the value-added tax (VAT), excise and customs duty, service tax, and much more were subsumed.
Before the introduction of GST, 15% service tax was applicable that included 0.5% Swacch Bharat Cess (SBC) and 0.5% KrishiKalyanCess (KKC). This rate was applicable on your insurance premium. GST is now applicable at a rate of 18%, which will increase the premium by a marginal amount. However, GST will be applicable only on that component of the insurance premium that offers risk coverage.
Here are the top five insurance plans that will be affected by the new GST rates.
Unit-linked insurance plans (ULIPs)
The total premium on ULIPs is not towards providing life coverage. Some part of this amount is invested in various market-related products for wealth creation. The 18% GST on ULIPs will be applicable only on the premium amount that is paid towards securing life coverage. The investment component will not be impacted by GST.
Under ULIPs, the investment charges are recovered through liquidation of reserve units at the end of each month or quarter. Furthermore, risk coverage becomes expensive as you grow older. Additionally, fund management charges increase with more corpus. Therefore, determining the exact impact of GST on ULIPs may not be as simple as it appears. Nonetheless, you will have to pay a little more premium for ULIPs.
Term policies are pure insurance coverage plans. Therefore, GST will be applicable on the entire amount premium amount. As a result, you will pay approximately 2.61% more premium to purchase a term insurance plan.
Traditional plans with recurring premium
Such plans include investment as well as insurance coverage. GST will be applicable only on the coverage of these types of insurance plans. However, categorization may be difficult. Therefore, GST will be applicable on 25% of the total premium for the first year. For all subsequent years, GST will be levied only on 12.5% of the premium amount.
Single premium traditional plans
As per the GST news, the higher rate will be levied on 10% of the premium for single premium insurance policies. For example, if you had paid INR 5 lakh as the single premium before GST, the total amount would be INR 5, 07,500 (including 15% service tax). However, post-GST, the amount you will have to pay is INR 5.09 lakh, which is a nominal increase of 0.3%,
Non-life insurance plans
Non-life insurance policies include health, motor, and travel insurance. All these plans are pure risk cover policies and therefore, 18% GST is applicable from July 1 2017. The annual premium on most of these policies increases each year due to various factors, the increase in the amount is not completely attributable to GST. However, if the base premium remains constant, the increase in the premium amount would be 2.61% under the new tax regime.
Insurance coverage is crucial for your financial security and stability and must be an important component of your overall plan in spite of the nominal increase in this expense.