All You Need to Know About GST on Health Insurance
Updated On Nov 21, 2023
In the complex landscape of taxation, the Goods and Services Tax (GST) plays a pivotal role, impacting various aspects of our daily lives. One crucial area where GST has a significant influence is in the insurance industry. GST is levied on a wide range of goods and services, encompassing health insurance products as well, which is currently set at 18%.
Well, health insurance is a vital shield against the uncertainties that life may throw our way, providing financial support during times of medical need. However, understanding the implications of GST on health insurance is important for making informed decisions about your coverage.
So, let's discuss more about this topic in detail.
Table of Contents
- What is Goods and Services Tax (GST)?
- GST on Health Insurance
- Different Types of GST for Health Insurance
- Understanding the Variances in GST Across Insurance Categories
- Calculating GST on Health Insurance Premiums
- Impact of GST on Health Insurance Costs
- Benefits of GST on Health Insurance
- Drawbacks of GST on Health Insurance
- Insurance Policies Excluded from GST
- Impact of GST on Health Insurance Policy Renewal
- Frequently Asked Questions (FAQs)
What is Goods and Services Tax (GST)?
GST, or Goods and Services Tax, is a comprehensive indirect tax that was introduced in India in 2017. It replaced a complex and multi-layered tax structure that included various indirect taxes such as excise duty, service tax, and value-added tax (VAT). The primary aim of introducing GST was to simplify the tax system, eliminate cascading effects (tax on tax), and create a unified market for goods and services across the country.
One thing to note is that this tax applies all across the country, and it covers health insurance in its list along with other products and services.
GST on Health Insurance
The introduction of GST on insurance premiums has led to an increase in the overall cost for people who are planning to purchase health insurance policies. Previously, a service tax of 15% was applicable, and now, individuals must contribute an extra amount based on the current 18% GST rate.
It's important to note that the premium you pay for your health policy covers a wide range of medical expenses beyond just hospitalisation costs. This includes maternity care, OPD charges, diagnostic tests, day-care treatments, pre-hospitalization charges, and more. When acquiring a health insurance policy, be aware that you are obligated to pay an 18% GST on the premium, marking a 3% increase compared to the previous tax rules in this industry.
Different Types of GST for Health Insurance
Following are the three different kinds of health insurance GST rates:
- Central GST (CGST): This is the tax charged by the central government when you buy health insurance within your own state. So, if you're getting a policy for medical coverage in the same state, you pay CGST.
- State GST (SGST) and Union Territory GST (UTGST): When you purchase health insurance within your state or Union Territory, the state government charges SGST or UTGST.
- Integrated GST (IGST): This comes into play when you're buying health insurance across different states or Union Territories. It's a mix of the CGST and the SGST/UTGST, with the central government collecting it.
Understanding the Variances in GST Across Insurance Categories
The application of GST on different insurance plans varies. Here's an insight into it:
- Term Insurance Plans: Recognized as the most cost-effective form of life insurance, term insurance plans are subject to an 18% GST on premiums. For instance, if your premium is Rs. 100, an additional Rs. 18 must be paid as tax.
- Unit Linked Insurance Plans (ULIPs): The GST rate for ULIPs remains consistent at 18%. However, this is applied to various charges, including fund management charges.
- Endowment Plans: Endowment plans exhibit a distinct GST rate structure. On first-year premiums, a GST rate of 4.5% is applicable, while from the 2nd year onwards, subsequent premiums are subject to a GST rate of 2.25%.
- Single Premium Annuity Policies: For lump sum payments in single premium annuity policies, the GST rate is set at 1.8%.
Calculating GST on Health Insurance Premiums
The calculation of Goods and Service Tax (GST) on health insurance premiums varies from that on life insurance. For medical insurance, the GST is applied to the entire premium amount, while for life insurance, it is charged on the risk coverage portion rather than the investment component.
Let's illustrate GST on health insurance premium with an example:
EXAMPLE: Suppose you have acquired a health insurance policy with a sum insured of Rs. 12 lakh, and the annual premium is Rs. 24,000.
- Before GST Implementation: The tax rate was 15%. The premium amount was calculated as follows:
(15% GST on Rs. 24,000) + Rs. 24,000 = Rs. 27,600
- After GST Implementation: The tax rate is now increased to 18%. The new premium amount is determined as follows:
(18% GST on Rs. 24,000) + Rs. 24,000 = Rs. 28,320
Consequently, there is an additional cost of Rs. 720 compared to the previous insurance premium.
Impact of GST on Health Insurance Costs
The introduction of GST has led to an increase in the cost of health insurance. In the past, when buying health insurance, policyholders were liable to pay 15% service tax, which comprises 14% for basic service tax, 0.5% for Swach Bharat cess, and 0.5% for Krishi Kalyan Cess.
But, with the revised GST on health insurance premium rates, there is now an additional tax burden of 3% when buying or renewing medical insurance policies.
Benefits of GST on Health Insurance
Below-mentioned are the positive sides of GST on health insurance:
- Competition and Savings: Due to increased premium prices, GST makes insurance companies compete more, which means they try to attract customers by lowering prices and cutting costs. This competition helps you, the buyer because you might find cheaper insurance policies.
- Better Services: Because of the competition, health insurance companies will improve their services, like making it easier for you to file claims or buy a policy. This is good for you, as you will get better service even if the price doesn't change much.
- Happier Customers: Insurance is all about protecting you, and with GST, insurance companies will try harder to make customers happy.
So, having GST on insurance makes the overall experience better for you.
Drawbacks of GST on Health Insurance
Here are a few drawbacks of health insurance GST rate:
- Extra Costs for You: GST on health insurance means you have to pay more. It adds extra charges to your insurance, making it more expensive.
- No Tax Benefits for Some: If you bought health insurance, you can't get some tax benefits because of GST. Even companies with insurance for their employees can't get certain tax benefits due to current GST rules.
Insurance Policies Excluded from GST
Certain insurance policies in India enjoy an exemption from Goods and Services Tax (GST).
- Pradhan Mantri Vaya Vandana Yojana
- Pradhan Mantri Jan Dhan Yojana
- Varishtha Pension Bima Yojana
- Aam Aadmi Bima Yojana
- Insurance coverage for the Navy, Army, and Air Force provided by the state and central government
Impact of GST on Health Insurance Policy Renewal
For policies purchased before the introduction of the GST law, only the renewal will be subject to a GST rate of 18%. Therefore, there is no requirement to adjust the service taxes paid based on the notified GST rate for these older policies.
This means that policyholders renewing their insurance policies must bear the GST on health insurance premiums during the renewal process.
Understanding the implications of GST on health insurance is crucial for informed decision-making. With a current GST rate of 18%, there's a noticeable impact on the cost of health insurance premiums. While GST for health insurance fosters improved services for the policyholders, it also brings about challenges such as additional expenses for policyholders and limitations on tax benefits. But despite the challenges, the overall goal of GST is to create a more competitive and customer-centric insurance landscape.
Frequently Asked Questions (FAQs)
Ques 1. How does GST impact the cost of health insurance policies?
Ans. With the introduction of GST, the cost of health insurance has increased. Previously, a 15% service tax was applicable, but now, policyholders face an additional 3% tax burden with the current 18% GST on health insurance premiums.
Ques 2. Are there any insurance policies exempt from GST in India?
Ans. Yes, certain insurance policies enjoy an exemption from GST. These include Pradhan Mantri Vaya Vandana Yojana, Pradhan Mantri Jan Dhan Yojana, etc.
Ques 3. How does GST impact the renewal of health insurance policies?
Ans. For policies purchased before the introduction of the GST law, only the renewal is subject to a GST rate of 18%.