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Understanding GST on Life Insurance Premium: Key Insights

GST introduced a single tax rate for insurance, simplifying taxes for both buyers and insurers. This led to increased transparency and improved technology adoption in the insurance industry.

  • 23,824 Views | Updated on: Mar 12, 2024

The introduction of GST has brought about several changes in the life insurance sector in India, ranging from changes in premium rates, operational processes, compliance requirements, and customer behavior. The impact of GST on life insurance has been both positive and challenging, with insurers and policyholders adapting to the new tax regime.

Key Takeaways

  • GST replaced multiple taxes with one, simplifying the tax system for insurers and policyholders.
  • It brought uniformity in tax rates across all states, making it easier to compare insurance products.
  • GST increased the scope of ITC for insurers, resulting in potential cost savings for policyholders.
  • It has encouraged insurers to invest in technology, leading to more efficient operations and enhanced customer service.
  • Policyholders should understand the applicable GST rate on their insurance products and how it impacts their overall costs.

Goods and Service Tax (GST) is an indirect tax applicable to the supply of goods and services, which was enacted on July 1, 2017, replacing a set of indirect taxes. A destination-based tax levies charges at the point of consumption of the goods or services, succeeding the origin-based tax.

One of the key changes brought about by GST is the streamlining of the taxation system. Previously, a complex web of taxes like service tax, VAT, and central excise applied to different aspects of insurance premiums, leading to confusion and increased administrative burdens. GST replaced these multiple taxes with a single tax, making it easier for policyholders to understand and calculate their tax liabilities.

How Does GST Work in Insurance?

The implementation of GST has significantly impacted insurance products and services. One of the fundamental changes is the increase in the cost of insurance premiums due to the additional GST component.

  • Insurers are required to charge GST on the premium amount, and policyholders must pay the total premium amount inclusive of the tax. Moreover, insurers must comply with the GST regulations and file regular GST returns.
  • It helps maintain proper records of all the insurance transactions. This includes the policyholders’ details, premiums collected, and GST charged.
  • It also involves submitting the same details to the tax authorities within the provided time frame. Failure to comply with the GST regulations can result in penalties and fines for insurers.
  • Policyholders should also ensure that the insurers they deal with are registered under the GST regime and comply with the GST regulations to avoid future complications.

GST on Life Insurance Premiums

Under GST, life insurance premiums are subject to an 18% tax rate. It has increased the overall cost of life insurance for policyholders.

Impact on Policyholders

The impact of GST on life insurance premiums has been felt by policyholders in various ways.

  • One of the most significant effects is the increased cost of insurance premiums.
  • With the 18% GST on insurance premiums, policyholders must pay more for the same coverage, which can impact their financial planning and budgeting.
  • The initial implementation of GST faced technical glitches and administrative hurdles, leading to delays in policy renewals and claims processing.
  • While life insurance premiums decreased, the tax liability on maturity proceeds increased, impacting the overall returns for policyholders.

Impact on Insurance Companies

While GST has presented challenges and opportunities for insurance companies, the long-term benefits outweigh the negatives.

  • GST has increased the administrative burden on insurance companies, as they must ensure compliance with GST regulations, maintain accurate records, and file regular GST returns.
  • Furthermore, insurance companies may need help marketing and selling life insurance policies due to the increased cost of premiums.
  • The higher cost may discourage potential policyholders from purchasing insurance policies, reducing insurance companies’ sales and revenue.

Impact of GST on Term Insurance

The arrival of GST in India brought mixed changes to the term insurance, leading to mixed effects. Here is an overview of how it has affected term insurance:

Reduced Premiums

Insurance companies used to pay multiple taxes on their business, which increased their costs. GST replaced those taxes with a single tax of 18%, saving the companies money. Because of this, they can now offer reduced premiums on health insurance, typically between 2% and 5% cheaper than the previous price.

Increased Transparency

GST brought uniformity in the tax structure across all states, making it easier for policyholders to compare premiums and understand the associated tax components. This improved transparency and facilitated informed decision-making.

Simplified Administration

The streamlined tax system reduced compliance costs for insurers, allowing them to focus on their core business activities and enhance operational efficiency. This potentially translates to better customer service and faster claim processing times.

Impact on Policyholders of Term Insurance

GST has also brought about some positive changes for policyholders of term insurance.

Eligibility for Input Tax Credit (ITC)

The GST regime has introduced a key benefit for term insurance policyholders: Input Tax Credit (ITC) for insurers. It allows insurers to claim back the GST paid on various inputs and services used to provide the insurance policy. The resulting cost savings for insurers can then be passed on to policyholders through lower premiums or improved policy features.

Simplified Tax Structure

GST has simplified the tax structure for term insurance, replacing multiple taxes like service tax, Value-Added Tax (VAT), and Central Sales Tax (CST) with a single tax. It has reduced complexity and improved compliance for insurers, which could benefit policyholders in terms of better service and streamlined processes.

Improved Efficiency

GST streamlined the tax administration process, reducing paperwork and compliance costs for insurers. This led to faster processing times and improved customer service.

Wider Product Range

The affordability boost from GST encouraged insurers to develop new products and offer them to a broader customer base, increasing access to insurance coverage.

Technological Advancement

GST encouraged insurers to invest in technology for efficient operations and enhanced customer experience through digital platforms and data analytics.

What are the Advantages of GST for Insurance Buyers?

While GST (Goods and Services Tax) implementation initially caused concerns for insurance buyers due to potential price increases, it has ultimately brought several advantages, including:

Streamlined Taxation System

One of the primary advantages of GST for insurance buyers is the simplification of the taxation system. Before GST, multiple taxes, such as service tax, VAT, and central excise, were levied on different insurance premiums.

This complex tax structure often led to confusion and increased administrative burden for insurance buyers, insurers, and intermediaries. GST has replaced multiple taxes with a single tax, making it simpler for insurance buyers to calculate and pay their taxes accurately. It has resulted in a more efficient and transparent tax system, reducing the compliance burden for insurance buyers and enhancing their overall experience.

Uniform Tax Treatment

Another advantage of GST for insurance buyers is the uniform tax treatment across different types of insurance policies. Before GST, other insurance policies were subjected to different tax rates.

For instance, life insurance premiums were subject to service tax, while general insurance premiums were subject to VAT. This non-uniform tax treatment often led to complexities in determining the correct tax rate for various insurance policies. GST has eliminated the confusion and complexities associated with the different tax rates for various insurance policies, making it more convenient for insurance buyers to purchase and manage them.

Increased Input Tax Credit (ITC)

Input Tax Credit (ITC) is a mechanism that allows businesses to claim credit for the taxes paid on their purchases and offset it against the taxes collected on their sales. GST has significantly increased the scope of ITC, which has resulted in cost savings for insurance buyers. Before GST, insurers were not eligible to claim credit for various taxes paid on their inputs, such as services received from intermediaries, repair and maintenance of assets, and office supplies.

However, with the implementation of GST, insurers can now claim credit for taxes paid on their inputs, which has resulted in cost savings. It has also made insurance premiums more competitive, as insurers can now reduce their costs by availing ITC, resulting in potential savings for insurance buyers.

Transparency and Compliance

GST has brought greater transparency to the insurance industry by implementing a uniform tax rate across all states. It eliminates the confusion and complexity associated with different state tax rates. Insurance buyers can now easily compare insurance products and premiums across different companies, making informed decisions based on price and other factors.

The transparency of the tax system makes it easier for insurance buyers to understand the breakdown of their premiums and the taxes involved.

Increased Investment in Technology

GST has encouraged insurance companies to invest in technology to improve operational efficiency and customer service. There is a need to comply with the new tax regime and adapt to the changing market dynamics. Insurance companies invest in digital platforms, data analytics, and other technologies to improve their products and services.

These technological advancements benefit insurance buyers by providing more convenient and personalized insurance solutions.

Key Considerations for Insurers and Policyholders

Considerations for Insurers Regarding GST

  • Compliance: Ensure full compliance with GST regulations, including registration, accurate tax calculation and collection, timely filing of returns, and record keeping.
  • Premium Adjustment: Review and adjust premiums based on the impact of GST, ensuring transparency and fairness to policyholders.
  • Technology Upgradation: Invest in technology to automate processes, streamline administration, and enhance customer service in a GST environment.
  • Communication: Communicate the impact of GST on insurance products, premiums, and claims process to policyholders through various channels.
  • GST Impact Analysis: Regularly analyze the impact of GST on business operations, profitability, and long-term strategies.

Considerations for Policyholders Regarding GST

  • GST Rate: Understand the applicable rate on different insurance products and the impact on premiums.
  • Policy Comparison: Compare insurance products considering not only premiums but also the impact of GST on overall costs.
  • Tax Implications: Be aware of the tax implications of insurance premiums under the GST regime, especially for long-term plans.
  • Documentation: Keep accurate records of all insurance-related documents and transactions for tax purposes.
  • Claims Process: Understand the revised claims process under the GST regime and ensure timely submission of required documents.
  • Seek Clarification: Do not hesitate to contact the insurance provider or relevant authorities regarding any doubts or concerns related to GST.

Wrapping it Up

Despite initial concerns, implementing GST has ultimately proven beneficial for insurance buyers. The streamlined taxation system and technological advancements have led to a more efficient and user-friendly insurance ecosystem. While some challenges remain, insurers and policyholders can work together to ensure a smooth transition and reap the full benefits of the GST regime.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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