One of the wisest financial decisions you can make for your loved ones is to purchase a term insurance policy. It is like building a cushion which takes care of your loved ones when things get tough. If you are young and just started your career or already have family responsibilities, term insurance ensures that your family remains financially protected even without you.
But if you wish to purchase a term insurance policy, you may see that the premium which you are paying is slightly more than what the insurance company first indicates to you. This is due to a tax known as GST. Everyone is confused about how it functions and why they need to pay for this through their premium. So let us break it down.
What Is Term Insurance?
Term insurance plans are life insurance policies that provide coverage for a definite period of time, say 10, 20, or 30 years. If the person insured expires during the specified period, the insurance company pays a sum of money in a lump sum (also known as the sum assured) to the nominee or the family.
The greatest advantage of term insurance is that it’s really cheap. You can have a huge amount of cover, even ₹1 crore and above, for a very reasonable monthly premium. It’s perfect for people who desire the assurance that their family members won’t have to endure financial problems.
But if you go through your premium details, you’ll observe that the last cost is a little greater than the normal premium. And that’s where GST enters the frame.
Learning GST on Term Insurance
Finally, let’s get down to the most crucial part, GST on term insurance. GST, or Goods and Services Tax, is a tax the government of India imposes on the sale of goods and services. GST was launched in 2017 to make India’s tax system simpler. Previously, numerous taxes, such as service tax and VAT, were charged individually. But now, all such taxes fall under one tax – GST.
While purchasing the term insurance policy, you are actually paying for the service rendered by the insurance company. As such, GST applies to your premium according to the government rules. The rate of GST on term insurance premiums is 18%.
Now, if your basic premium is ₹10,000, then ₹1,800 (18%) will be charged additionally as GST, and hence your total payable as premium would be ₹11,800.
Why Is GST Applicable on Insurance?
Everybody asks why insurance is taxed. It’s a system of protection, not a luxury, actually. But the reason is simple: insurance companies are offering a service, and GST is a tax on each service in India.
The amount earned under GST is then passed on to the government, which uses it towards public development, health, and infrastructure. So, in essence, you’re also contributing to the development of the country as you pay this tax.
How GST Impacts Your Term Insurance Premium?
GST has a direct impact on what you end up paying as a premium for your term insurance policy. Let’s see how through a simple example:
- Let’s assume your pre-tax yearly premium is ₹15,000.
- 18% GST adds another ₹2,700.
- Your yearly payment would therefore be ₹17,700.
Now, the amount might not be huge, but if you spread it over some years, the total expense can pile up. For instance, if your policy is for 20 years, the additional amount you would have to pay under GST alone would be ₹54,000 (₹2,700 × 20 years). That’s why you know the GST mechanisms better so that you can plan your insurance payables accordingly.
Does GST Vary for Varying Policies?
Yes, GST varies based on the insurance policy.
- Term Insurance Plans: GST is 18% of the premium.
- Life Insurance (investment or saving): GST is only on a portion of the premium and not on the entire amount since a portion of it is being invested.
- Health Insurance Policies: GST is also 18% on health premiums.
So, if you need pure protection with no investment, you will be charged 18% GST on the entire premium amount.
Can You Save Tax Even After Paying GST?
Yes, although you pay GST on term insurance, you can save by availing tax benefits. According to Section 80C of the Income Tax Act, you can deduct (up to ₹1.5 lakh in a year) the premium you pay for term insurance.
Which means you can subtract your taxable income by the premium amount, which you pay, plus the GST component. What it implies is that despite having already paid GST, you still have tax relief.
Is There a Method to Reduce the Effect of GST?
Though you cannot escape paying GST since it is a government initiative, there are clever ways of handling it better:
- Buy a multi-year policy: Some companies offer a discount if you pay for multiple years in one go. You will still have GST, but your net premium could be lower.
- Pay premiums annually: Whatever is paid monthly or quarterly can end up costing a little more over time. Paying annually can reduce your net load.
- Utilize online channels: Insurance providers also provide additional discounts if you purchase term insurance online. This discount can offset the cost of GST.
So, while you cannot avoid paying the tax, you can plan sensibly to make your payments within your limit.
How to Calculate GST on Your Term Insurance
It is easy to determine how much GST you pay on your premium.
Here’s a simple formula:
GST Amount = (Base Premium × GST Rate) / 100
Example:
Suppose your premium is ₹20,000 and the GST rate is 18%. Then,
GST Amount = (₹20,000 × 18) / 100 = ₹3,600.
Thus, your payable premium would be ₹23,600.
Now, all insurance websites clearly indicate the GST amount separately, so you can see very clearly how much you’re paying.
Why Understanding GST Is Important
Understanding how GST affects your term insurance is imperative as it enables you to make intelligent choices. You will understand your overall cost, be able to compare plans more effectively, and plan your finances accordingly.
Most people are just obsessed with the base premium and lose sight of the fact that there is a GST component. Then, later on, they get confused or feel cheated when they actually go ahead and compute the same figure again. Once you see the pattern, there is no confusion whatsoever.
The Bigger Picture: GST and Money Planning
While GST does contribute a little towards your total cost, it is well worth the cost of financial safety. A term plan policy ensures your family’s economic future is safe, even if life comes your way with some unexpected challenges.
If you consider it, shelling out a few hundred rupees more each year in the form of taxes is peanuts in comparison to the security and peace of mind it provides. It is like paying a small maintenance charge so that your future is secure.
Conclusion
Term insurance policies are among the most worthy financial products of the times. They offer you maximum coverage at minimum premium, ensuring that your precious ones are always protected. And although GST on term insurance charges a little extra on your premium, it doesn’t cut down on the value of the plan.
The key is to know how GST operates, pay your tax intelligently, and avail tax savings under Section 80C. After doing all this, you will notice that term insurance continues to be the cheapest and most fundamental investment for every Indian family. So the next time you purchase or renew your term policy, remember, GST is just one step forward, not an obstacle. You’re not purchasing the policy; you’re investing in peace of mind for your family.
