The GST council in its overhaul of the indirect tax regime has exempted life and health insurance policies from the levy. At present, these policies attract 18 percent GST.
The new goods and services structure, which will kick in from September 22, will have only 5 percent and 18 percent slabs, with a special rate of 40 percent for the so-called sin goods.
The change has left several policyholders wondering if exemption on insurance premiums will apply if the premium due date falls before September 22 but the payment is made later during the “grace period”.
Insurance companies generally allow 15-30 days for premium payment after the renewal date.
According to Himank Singla, Partner, SBHS & Associates, the answer lies in Section 14 of the GST law, which deals with cases where there is a change in the rate of tax for supply of services.
"If the renewal due date is before September 22 and the insurer has already issued the invoice, the supply is deemed to have happened before the exemption kicks in. So, even if you pay later during the grace period, GST will still apply," Singla said.
If the insurer chooses not to issue the invoice immediately on the due date and instead raises it only after September 22, then invoice and payment fall in the post-exemption period. In such cases, the premium can qualify for GST exemption, Singla said.
The opinion, however, differs across the industry, as there is no clarity yet. "If the insurance policy renewal is due before September 22, policyholders can technically avail the GST exemption by paying the premium during the grace period, since the effective date of premium payment is what matters for taxation," said Siddharth Singhal, Head of Health Insurance, Policybazaar.
This approach comes with a significant risk. The grace period only protects you from a policy lapse but it does not provide active coverage for claims during the period. In other words, if a claim arises while the policy is in the grace period, it will not be admissible.
"So while one might save on GST by delaying the payment, the downside is the risk of being without valid cover for those days. For this reason, it is not advisable to wait for the grace period merely to take advantage of the tax exemption. The priority should always be to ensure uninterrupted coverage rather than trying to time the premium payment," Singhal said.
Delaying renewal to save GST is not advisable. During the grace period, your policy is in a lapsed state and you remain uninsured, and any claims arising during the period will not be honoured. The risk of being without cover outweighs the benefit of reduced GST.
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