How do the GST laws affect ULIP premiums?



How do the GST laws affect ULIP premiums?

Right after graduating, Madhav started working with a company. There were two pieces of advice he kept receiving from everyone: first, start investing your money and second, get a life insurance policy. One of his colleagues who joined the company with him told him about this unit linked insurance plan he got, which has both components, life insurance as well as savings.  After learning about this, Madhav quickly looked up ULIPs on the Internet, and while doing so, he learnt that GST applies to ULIP premiums, but only a part of them, and was left feeling confused.

ULIPs and ULIP premiums

Individuals take out ULIPs (Unit Linked Insurance Plans) with the aim of providing support to their beneficiaries in the case of their untimely demise. ULIPs are a combination of insurance and investment. A ULIP requires individuals to pay an amount either on a monthly or yearly basis. A portion of that becomes the premium for the individual’s life insurance coverage, while the rest is invested, akin to a mutual fund. ULIPs are popular because they offer both, life cover and wealth generation in the same plan.

The ULIP premium is the amount of money you pay to the insurance company on a regular basis (monthly, bi-annually, annually, etc.)

GST

GST, or Goods and Services Tax, is an umbrella tax that has replaced many indirect taxes in India. It came into effect on the 1 st of July, 2017. GST applies to the supply of goods and services, as the name suggests. While before, there were multiple taxes at different levels (VAT, excise duty, etc.) there is now only one uniform tax – the GST.

GST on ULIP premium

Policy type Pre-GST taxation rate Rates after GST
Term Insurance Plan 15% 18%
Unit Linked Insurance Plan 15% 18%
Motor Insurance 15% 18%
Health Insurance 15% 18%
Endowment policies (1 st year) 3.75% 4.50%
Endowment policies (2 nd year onwards) 1.88% 2.25%
Annuity – Single Premium 1.50% 1.80%

Source: Coverfox
GST is different for all three, term insurance plans, unit linked insurance plans and endowments. For unit linked insurance plans, the premiums paid have two components: one being risk cover and the other being investment.

The text of the GST rules regarding life insurance is as follows:

  • The gross premium reduced by the amount allocated for investment, or savings on behalf of the policy holder.
  • In case of single premium annuity policies, 10% of single premium charged from the policy holder.
  • In all other cases, 25 per cent of the premium in the first year and 12.5% of the premium in subsequent years. So, if the premium of an endowment plan is Rs 100, the GST of 18 percent will be applicable on the 25 percent of the premium i.e. on Rs 25, so, Rs 4.5 will be the GST amount.
  • If the entire premium paid by the policy holder is only towards the risk cover in life insurance such as in term insurance plans, the GST of 18 percent will be on the entire premium.

So, effectively, for levying GST on ULIP premiums, the premiums have to be broken down into their two parts to assess taxation. The investment portion does not come under the ambit of GST, while the risk cover does.

Simplifying with the help of an example:

Pooja pays a premium of ?1,200 for her unit linked insurance policy. Out of the ?1,200, ?800 is earmarked for investment, with the rest i.e. ?400 going towards risk cover. So, instead of being taxed 18% on the whole premium of ?1,200, Pooja will only be taxed 18% on the risk cover part i.e. ?400. So, Pooja will effectively end up paying ?72 as GST on ULIP premium.

Before the implementation of GST, she would have been charged 15% tax on ?400, making ?60 her GST on ULIP premium.

Investment plans, especially ULIPs are a great way to think ahead and plan for your future. Future Generali offers a great selection of ULIPs and helps individuals pick the right plan for them, so they can secure their future and their dreams.