The season for submitting proof of investments in tax-saving products has already set in and, in all probability, your employer would have already asked you to furnish them. While it’s common knowledge that premiums paid for life as well as health insurance give tax benefits under Sections 80C and 80D, respectively, did you know that you can also claim deduction on the tax paid on these premiums?
When you pay a premium for a life or health policy, you also have to pay goods and services tax (GST), which effectively increases the overall premium. GST is charged on different parts of the premium, depending on the type of policy you buy. This changes the effective rate of GST on different policies. We tell you how GST works for health and life insurance policies.
You have to pay GST at the rate of 18% on health insurance policies. So if your premium is ₹21,000, GST at 18% will come to ₹3,960, and you will end up paying a total premium of ₹24,960.
This will also help you almost completely exhaust your deduction limit of ₹25,000 available under Section 80D for premiums paid for a health policy taken for yourself and your family, including spouse and two dependant children.
In case of life insurance, GST is levied on different parts of the premium, depending on the type of policy you are buying. You are allowed to claim deduction against GST paid on the premium, provided it is within the overall limit of ₹1.5 lakh available under Section 80C.
In case of a term plan, GST is levied at the rate of 18% on the entire premium of the policy, just like in health insurance. Suppose, a 30-year-old male who is a non-smoker pays a premium of ₹9,000 for a sum assured of ₹1 crore over 20 years. GST on this amount will come to ₹1,620. But the total premium paid— ₹10,620—will be eligible for tax deduction.
In the case of unit-linked insurance plans, which offer a combination of insurance and investment, GST is only levied on the charges, including premium allocation, policy administration, fund management and mortality charges. No GST is levied on the investment part.
In the case of endowment or traditional plans, which also bundle insurance and investment, GST is levied only on 25% of the total premium in the first year of the policy, which effectively reduces the GST rate to 4.5% of the premium paid in that year. In all subsequent years, GST is levied on 12.5% of the total premium paid, which effectively reduces the GST rate to 2.25% for the rest of the tenure.
So when you fill in the details of the premiums paid for life and health insurance policies in the investment proof form provided by your employer, don’t forget to mention the total premium paid, including GST.