GST on purchase of annuity thru IT recognized Trust Fund

Hey Jayanta!

Your query about GST on annuity purchased through an IT-recognized Trust Fund is interesting and has been a point of discussion for many.

Key Points:

1. IT-Recognized Trust Fund:

   • The fund managing superannuation is recognized under Income Tax laws.

   • Contributions and income of such funds are usually tax-exempt under Income Tax.

2. Purchase of Annuity:

   • The Trust uses corpus funds to buy annuity policies from LIC (or other insurers).

   • Annuity policy is in the name of the Master Policy Holder (the Trust), with sub-accounts for employees.

3. GST charged on annuity purchase:

   • LIC charges 2% GST (Insurance GST) on the premium or purchase price of annuity.

   • This reduces the effective pension value for the member.

Why GST is applicable here despite IT exemption?

• GST and Income Tax are separate laws with independent scopes.

• Recognition or tax exemption under Income Tax Act does not automatically exempt supplies under GST.

• Annuity purchase is considered as supply of insurance services by LIC to the Trust.

• Since it is a taxable supply, GST at 2% is levied on the premium.

• The superannuation trust or the member is not exempt from GST just because the trust is IT-recognized.

• GST is levied on the supply of insurance service by the insurer.

What about GST on disbursement?

• GST is charged at the time of premium payment to LIC (i.e., purchase of annuity).

• On disbursement of pension, GST is not separately applicable because that is a payout under annuity contract.

• The 2% GST on premium reduces the corpus used to buy annuity, effectively reducing pension.

Summary:

Possible Workarounds:

• Unfortunately, GST on insurance premium is mandatory as per law.

• Employer/Trust may explore negotiating with insurer or structuring contributions for optimal tax efficiency.

• No current exemption under GST for insurance premium paid by superannuation trusts.