Navigating Goods and Services Tax on Life Insurance Corporation Premiums

The Goods and Services Tax (GST) regime applies to insurance policies, including those from LIC, albeit with varying rates depending on the policy type. This article provides a comprehensive overview of GST implications on different LIC offerings like term plans, endowment plans, pension plans, ULIPs, and health plans. It also covers GST on associated charges, place of supply rules, applicable SAC codes, and specific exemptions and advance rulings related to LIC premiums. Understanding these nuances is crucial for policyholders and stakeholders to navigate the tax landscape of insurance in India.

📖 6 min read read🏷️ Insurance

Insurance, categorized as a service, falls under the Goods and Services Tax (GST) framework. Before GST implementation, most insurance products were subject to a 15% service tax. Post-July 1, 2017, premiums for all insurance policies, including those from Life Insurance Corporation (LIC), faced higher GST rates, leading to increased costs for these policies. However, not all LIC premiums attract a uniform GST rate; the applicable GST varies across different policy types, which is detailed below.

Scope of Taxation for LIC Insurance Policies Under GST

An insurance policy consists of two main components: investment and risk protection. Only the risk protection part of the policy is subject to GST. Consequently, varying GST rates are applied to the premiums of different life insurance policies.

LIC's life insurance offerings broadly categorize into term plans, endowment plans, pension plans, and Unit-Linked Insurance Plans (ULIPs).

GST on LIC's Term Plan Premiums

Term plans represent the most affordable type of insurance, covering only mortality costs. The Goods and Services Tax on term life insurance premiums is 18%.

For instance, if a policyholder acquires a LIC term life insurance policy with a premium of Rs. 10,000, they are required to pay an 18% GST on this amount, totaling Rs. 1,800.

Furthermore, if a policyholder chooses an additional benefit, such as an accidental death rider, an 18% GST will be applied to the extra premium charged for this rider.

GST on LIC's Endowment Plan Premiums

Traditional life insurance policies combine both investment and insurance aspects. For these, a GST of 4.5% is imposed on the first-year premiums, while subsequent premiums are subject to a 2.25% GST.

Specifically, an 18% GST is collected on 25% of the first year's premium, which is simplified to a 4.5% GST rate. Similarly, an 18% GST is levied on 12.5% of premiums in following years, rationalized to 2.25% GST.

For example, if an individual pays an annual premium of Rs. 10,000 for an endowment plan, the GST on the LIC premium in the first year will be 4.5%, amounting to Rs. 450. For premium payments in later periods, a GST of 2.25% will be charged, which equals Rs. 225.

GST on LIC's Pension Plans or Annuities

For insurance pension plans, including single annuities where a lump sum payment secures an annual income post-retirement, the applicable GST rate on life insurance premiums is 4.5%.

However, if a policyholder opts for a single premium payment for LIC annuity plans, this premium will attract a 1.8% GST rate. For instance, if an individual pays a lump sum of Rs. 10 lakhs, this lump sum will be subject to a 1.8% GST, totaling Rs. 18,000.

Technically, an 18% GST is imposed on 10% of the single premium collected for annuity plans.

GST on LIC's ULIPs

Unlike other LIC life insurance policies, Unit-Linked Insurance Products (ULIPs) do not incur GST on their premiums directly. Instead, an 18% GST is levied on specific charges such as fund management, premium allocation, policy administration, and mortality charges. This is because a ULIP's premium is partially invested and partially used for insurance coverage, and the investment portion is exempt from GST.

GST on LIC's Health Plans

Beyond life insurance, LIC also provides health plans to its customers. Premiums for these LIC health plans (both individual and family) are subject to an 18% GST.

For illustration, if a policyholder purchases a LIC health plan for a premium of Rs. 10,000, they are required to pay an 18% GST on this amount, which totals Rs. 1,800.

To better understand the impact of GST on insurance services, you can click here.

GST on Other Components of LIC Policies

Apart from the main premiums, several other components associated with LIC policies are also subject to GST. These components are listed below.

GST on Late Fees

An 18% GST rate is applied to interest charged on overdue premium payments. Nevertheless, GST is not applicable on delayed premium receipts for policies that are exempt.

GST on Cheque Dishonor Charges (CDA)

A GST of 18% is chargeable on Cheque Dishonour Charges (CDA), which includes postage fees.

GST on Charges Recovered from Policyholders

Various fees paid by policyholders, such as alteration fees, quotation fees, and charges for preparing duplicate policies, are subject to GST. Additionally, GST is levied on fees collected for providing written acknowledgment of assignment notice receipt or for registering cancellation or changes to nominations.

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Frequently Asked Questions

What is the primary objective of GST in India?

The Goods and Services Tax (GST) was introduced in India to streamline the indirect tax structure by replacing multiple taxes with a single, comprehensive tax system, aiming to create a common national market and reduce the cascading effect of taxes.

How does Input Tax Credit (ITC) work under GST?

Input Tax Credit (ITC) allows businesses to reduce their tax liability by claiming credit for the GST paid on purchases of goods and services used for making taxable supplies. This mechanism helps avoid double taxation and ensures tax is levied only on the value added at each stage of the supply chain.

What are the different types of GST in India?

In India, there are four main types of GST: Central GST (CGST) collected by the Central Government, State GST (SGST) collected by State Governments, Integrated GST (IGST) collected by the Central Government on inter-state supplies, and Union Territory GST (UTGST) for supplies within Union Territories.

Who is required to register for GST?

Businesses with an annual aggregate turnover exceeding a specified threshold (currently Rs. 20 lakh or Rs. 10 lakh for special category states) are generally required to register for GST. Additionally, certain businesses, regardless of turnover, such as inter-state suppliers and e-commerce operators, must register.

What is the HSN Code and SAC Code in GST?

The Harmonized System of Nomenclature (HSN) code is a globally recognized system for classifying goods, used in GST for identifying tax rates on goods. Similarly, the Services Accounting Code (SAC) is a system for classifying services, used to determine GST rates on services.

Who is required to file GST returns?

All registered taxpayers under GST are required to file periodic returns, which detail outward supplies (sales), inward supplies (purchases), input tax credit claimed, and tax payable. The frequency and type of return depend on the taxpayer's registration and turnover.