How GST laws affect ULIP premiums?

When you start earning, you might save a specific proportion of your money for a secure future. However, savings might not allow the productive growth of your money. Since your hard-earned savings can lie in the corner of your vaults, you should regularly invest to ensure the growth of your funds. Although there are different investment options such as Mutual Fund, Equity Linked Savings Scheme (ELSS), and so on, you should purchase a Unit Linked Insurance Plan (ULIP).

A ULIP plan is a dual-benefit financial product, which is a mix of investment as well as insurance. When you purchase a ULIP policy, you should pay your premiums regularly to receive ULIP benefits throughout the tenure of the policy. While a specific proportion of your premiums can be diverted for the coverage, the remaining might be channelled towards your funds. Although the premiums might be low, the Goods and Service Tax (GST) is applicable on ULIP premiums.

As the name suggests, GST can be applicable to the supply of all goods and services. Hence, it is applicable to most of the traditional and non-traditional insurance products, including a ULIP policy. However, GST can differ for every insurance policy. Under a life insurance product, the GST tax is levied based on the following conditions:

  • The gross premium can be reduced by the invested amount or savings on your behalf.
  • If you have a single premium annuity plan, your insurer can charge 10% of single premium.
  • While the premium charged in the first year can be 25%, the premium for the subsequent years can be over 12.5%. For instance, if the premium amount of an endowment plan is Rs. 100, 18% GST would be applicable on your 25% of the premium.
  • Under term policies, your whole premium would be directed towards life coverage. Hence, the applicable GST for term plan can be 18%.

For a ULIP policy, the premium can be split into two parts: risk coverage and ULIP funds to evaluate taxation. However, the investment component might not fall under GST, while the insurance element does. Therefore, let’s understand the GST impact on a ULIP policy with the help of an illustration given below:

Riya has to pay a premium amount of Rs. 1,200 every month after the purchase of a ULIP policy. From the whole premium amount of Rs. 1,200, a specific proportion of Rs. 800 goes towards investment, while the remaining amount of Rs. 400 is directed towards the coverage. Rather than taxing her entire premium amount, your insurer can tax only her coverage at 18%. Therefore, the GST on her ULIP premium would be Rs. 72. However, her premium would be taxed at 15% before the implementation of GST.

In a nutshell, a ULIP investment can allow you to not only save taxes but also grow your money to a substantial amount. The premiums and the death benefits can be eligible for tax exemptions under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Since a ULIP policy is flexible, you can select your premium payment tenure as well as the payout option for your loved ones.

Before selecting a ULIP policy, you should conduct a thorough research and compare different ULIP options in the market. Since there are multiple options for you, you should consider your financial needs and investment goals. Additional, you should choose a credible company and seek professional help to guide you through the entire selection process.