New Delhi. As different life insurance policies are available, the Goods and Services Tax (GST) applicable to them also varies. Insurance companies always quote the premium exclusive of GST, which is added when purchasing the policy.
Term plans or pure insurance plans which are the cheapest, charge a GST of 18% as it is a mortality premium and no amount is invested. For example, if your annual premium is Rs 10,000, then GST of Rs 1,800 will be applicable. If you buy any rider such as accidental death rider for additional payment 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 the entire amount excluding the premium towards the investment will attract 18% GST. ULIP premiums partly go towards mortality and partly investment and various charges to provide insurance cover.
In the case of traditional endowment policies, which bundle insurance and savings, GST is levied 4.5% on the premium for the first year and 2.25% on the premium for later years. So, out of the annual premium of Rs 20,000, Rs 900 will be GST in the first year and Rs 450 in later years.
In the case of insurance pension schemes or annuities, where you make a lump sum payment and receive an annuity in return, a GST of 1.8% applies. In this case, if you make a lump sum payment of Rs 5 lakh to get an annual income of Rs 40,000, then the GST component of the purchase cost will be Rs 9,000.
GST is also levied on other investments. In mutual funds, it falls under the overall cap to expense ratio set by SEBI. The low fund management cost of mutual funds reduces the impact of GST as tax is charged as a percentage of the cost. The lower the cost, the lower the GST. The National Pension System (NPS) also charges GST but it is a loan amount as the fund management fees are very low. After the maturity of the NPS account, if you buy an annuity, unlike insurance plans, there is no GST deduction.
