GST on LIC Premium | GST Exemptions

Classified as a service, insurance falls under the ambit of the GST regime. Pre-GST, most insurance products were charged a 15% service tax. After 1st July 2017, the premiums of all insurance policies, including LIC policies, are subject to a higher GST rate. This has ensued in a higher price for all insurance policies. However, all LIC premiums do not attract a uniform GST rate. Indeed, GST on LIC premium differs across various insurance policies, which we elaborate on below.

Scope of Taxation of LIC Insurance Policies Under GST

An insurance policy comprises two parts: investment and risk protection, out of which only the risk protection part is levied a GST. Therefore, different GST rates apply to the premiums of different life insurance policies.

LIC’s life insurance policies are divided into four broad categories: Term plans, endowment plans, pension plans, and ULIPs.

GST on LIC’s Term Plans Premiums

Term plans are the cheapest form of insurance as they only cover mortality costs. The GST on term life insurance premiums is 18%. 

To illustrate, if a policyholder buys a LIC term life insurance policy at a premium of Rs.10,000, he is liable to pay a GST of 18% on the premium amount, which equates to Rs.1,800.

Furthermore, if a policyholder opts in for an add-on, like an accidental death benefit, he will need to pay 18% GST on the additional premium levied for the rider.

GST on LIC’s Endowment Plans Premiums

Traditional life insurance policies bundle investment and insurance elements, a GST of 4.5% is imposed on the first-year premiums, while the subsequent premiums will attract a 2.25% GST. 

Note: Technically, a GST of 18% is collected on 25% of the first year’s premium, but it has been simplified to a 4.5% GST rate. Similarly, a GST of 18% is charged on 12.5% of the premiums collected in succeeding years, which has been rationalised to 2.25% GST.

For instance, if a policyholder pays Rs.10,000 as a premium annually, then the GST on the LIC premium of an endowment plan in the first year will be 4.5%, which totals Rs.450. For the premium payments in the subsequent periods, a GST of 2.25% will be charged, which amounts to Rs.225.

GST on LIC’s Pension Plans or Annuities

For insurance pension plans, including single annuities, where an individual pays a lump sum to get an annual income post-retirement, the applicable GST rate on life insurance premiums will be 4.5%.

However, if a policyholder chooses to pay only a single premium for LIC annuity plans, such a premium will attract a 1.8% GST rate. For example, if an individual pays a lump sum of Rs.10 lakhs, then such lumpsum will be levied a GST of 1.8%, amounting to Rs. 18,000.

Note: A GST of 18% is technically 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 attract GST on their premium. Instead, a GST of 18% is levied on the fund management charges and other cost heads, including premium allocation, policy administration, and mortality charges. This is because a ULIP’s premium is partly invested and partly used for providing insurance coverage, and the investment part is not subject to any GST levy.

GST on LIC’s Health Plans

In addition to life insurance policies, LIC offers health plans to its clients. The premiums of these LIC health plans (individual and family) are levied at a GST of 18%.

To illustrate, if a policyholder buys a LIC health plan for a premium price of Rs.10,000, he is liable to pay a GST of 18% on the premium amount, which amounts to Rs. 1,800.

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

GST on Other Components of LIC Policies

The levy of GST on LIC policies involves several other components in addition to the premiums charged. We enlist these components below.

GST on Late Fees

A GST rate of 18% is levied on interest charged on the delayed premium payments. However, no GST is applicable on delayed premium receipts for exempt policies.

GST on Cheque Dishonour Charges (CDA)

An 18% GST is chargeable on CDA, including postage. 

GST on Charges Recovered from Policyholders

The various charges paid by policyholders, including alteration fees, quotation fees, and duplicate policy preparation charges, are subject to GST. Additionally, GST is levied on charges recovered for rendering a written acknowledgement for receipt of notice of assignment/ registering cancellation or change of nomination. 

Place of Supply 

For determining the levy of GST on LIC premiums, the place of supply will be defined as follows-

• It will be the location of the insured/policyholder if he is registered.
• It will be the location of the recipient of services on the supplier’s records if he is not registered.
• It will be where the supplier company issues the policy if the recipient of services is registered in multiple states.
• It will be the location of the head office of the company when the said company has taken on a group insurance policy and has several branches across the country.
• It will be the location of the fund management’s office in case of ULIP funds.
• It will be the location of the registered person paying the premium in case of a master/group policy with a single premium and beneficiaries spread across different states.

Learn more about the determination of place of supply for GST levy here.

GST Rate and SAC code on LIC Premium for Insurance Policy

The applicable GST rates on different LIC life insurance and health policies have been tabulated below.

The heading 9971, ‘Financial and related services,’ covers insurance services. The applicable SAC codes for insurance policies are summarised below.

Exemptions to GST on LIC Premiums

As per Notification No. 12/2017, dated 28^th June 2017, the following insurance services and schemes are exempt under the GST regime. 

1. Insurance services provided by Insurance Regulatory and Development Authority (IRDAI)
2. Annuity plans under the National Pension Scheme (NPS) regulated by PFRDA
3. Life insurance services provided under government-run schemes, such as -

• Janashree Bima Yojana (JBY)
• Varishtha Pension Bima Yojana (withdrawn in 2015-16)
• Pradhan Mantri Jeevan Jyoti Bima Yojana
• Pradhan Mantri Jan Dhan Yojana
• Aam Aadmi Bima Yojana (AABY)
• Pradhan Mantri Vaya Vandana Yojana
• Life micro-insurance items with a maximum cover of Rs. 2 lakhs, as approved by the IRDAI 
• Any other insurance scheme of the state governments as notified by the Indian government on the recommendation of the GST Council.

Availability of ITC on GST on LIC Premium

Registered GST taxpayers can generally claim an input tax credit (ITC) on their supply of goods and services unless restricted under section 17(5) of the CGST Act, 2017. Hence, life and health insurance policyholders cannot claim any ITC on LIC premiums as these insurance products are meant for personal consumption.

In contrast to individual policyholders, corporate policyholders can enjoy ITC on the GST paid on their general insurance policies. However, as per section 17(5)(b), ITC is not available on their employees' group life and health insurance plans taken by corporate policyholders unless otherwise required by law.

Advance Rulings Related to GST on LIC Premium

In an Advance​​ Ruling No. KAR ADRG 30/2020, the Karnataka Advance Ruling Authority (AAR) declared that the proceeds received at the time of maturity of a LIC insurance policy would not attract GST as it is not a service. The GST on LIC premiums is levied as these life insurance policies are considered a service. But at the time of the policy’s maturity, no service is involved. Thus the maturity sum should not be considered while calculating aggregate turnover for the GST Act.

In TSAAR Order No.28/2022, The Telangana AAR ruled that the medical insurance premium paid on health insurance plans for the employees, pensioners, and their family members, is not exempt as per Entry No. 3 of Notification No. 12/2017 - Central Tax (Rate). The M/s. Hyderabad Metropolitan Water Supply and Sewerage Board, a government company, had contended that it is not liable to pay GST since it was a governmental authority whose pure services fall under Entry 3 of the CGST Act. So, municipal and statutory bodies are liable to pay GST on medical premiums. 

Conclusion

The Indian insurance market is already underpenetrated, with people looking at insurance policies from the lens of a tax-saving strategy rather than a tool ensuring financial and social security. The hiking of insurance covers’ prices after implementing the GST regime does not bode well for improving insurance coverage among Indians. Despite concerns being raised by LIC before several GST Council meetings, it is unlikely that the GST on LIC premiums will be reduced.

FAQs for GST on LIC premium

Is GST applicable on LIC premium?

Yes, the indirect tax laws dictate the applicability of GST on LIC premiums in India.

How much GST is levied on LIC premium?

The levy of GST on LIC premiums varies as per the policy. GST on LIC’s term life insurance plans is 18%, while endowment and pension plans attract 4.5% GST in the first year. GST on LIC annuity plans is only 1.8%.

How to calculate GST on LIC premium?

To calculate GST on LIC premium, multiply the applicable GST rate by the premium charged. The only exception is a ULIP, where GST is charged on the cost overheads. Generally, the final premium includes a breakup of the base insurance premium price and GST charges.

Why is GST charged on LIC premium?

Since LIC’s provision of insurance plans is defined as a supply of service under the GST act, thus, GST is applicable on LIC premiums.

What is the rate of GST on LIC premium?

The rate of GST on LIC premiums for general insurance plans is 18%.