GST: Banks & insurance companies want you to save money by prepaying premiums, should you?

Banks and insurance companies have been sending text messages to their customers telling about the increased rate of tax under Goods and Services Tax (GST), from 15% to 18%, that will be applicable from July 1, 2017. 

Their argument: Since tax paid on your insurance policies are set to go up under GST, prepay your premiums and save money! 

Customers currently pay 15% service tax for financial services. Starting from July 1, 2017 the GST will replace all indirect taxes like service tax and Value Added Tax. Financial services and telecom have been put in the 18% GST slab. 

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According to PTI report, HDFC Bank has sent messages to its customers saying, “Dear Customer, Govt of India proposes to implement Goods & Service Tax (GST) from 1st July. Consequently, the existing service tax rate of 15% shall be replaced by GST@18%".

In a message to its customers, SBI Card has alerted about the higher incidence of tax. “Important: The Government of India proposes to implement the GST which is likely to be effective from July 1, 2017. Consequently, the existing service tax rate of 15% shall be replaced by a GST rate of 18%,” the SMS sent by SBI Card read.

What does it mean?

In case of insurance premium, the insurance policies where the entire premium paid goes towards the risk cover such as in life insurance, or term insurance plans or general insurance policies for health or vehicle insurance, the GST of 18% will be on the entire premium. For other life insurance products, as per GST rules, the value of services on which GST is to be imposed is calculated as the gross premium minus the amount allocated for investment.

"In case of single premium annuity policies, 10% of single premium is taxable. So, for a Rs 1 lakh premium, Rs 10,000 would be taxed at 18% now as opposed to 15% earlier. So the tax payable goes up from Rs 1500 to Rs 1800," Adhil Shetty CEO & Co-founder Bankbazaar.com explained. 

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This means you have to pay Rs 300 more under GST.  

But should you prepay your insurance premium before July 1, 2017 even if it is up for renewal later this year to save Rs 300?

However, if you keep this Rs 1 lakh in your bank account instead of paying your insurance premium before July 1 under GST, then by November this year, the interest earned on that money will be Rs 1666.66. At 4% interest rate, Rs 1 lakh will earn Rs 4000 interest for the full year, therefore, for five months interest earned will be Rs 1666.66 (4000*5=20,000 and 20,000/12).

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Clearly, by prepaying your insurance company to save Rs 300 on GST, you are actually losing Rs 1266.66 on bank interest for your money. 

Simply put, do not fall for your insurance company's claims and do your calculation before prepaying your insurance premium policy to save some money on GST.