GST on Health and Life Insurance May Drop to 5%, Full Exemption Unlikely
GST on Health and Life Insurance May Drop to 5%, Full Exemption Unlikely
The Goods and Services Tax (GST) Council is expected to reduce the tax rate on health and life insurance premiums instead of granting a full exemption, sources have indicated. Currently taxed at 18% on gross premiums, the rate may be brought down to 5% while retaining the input tax credit (ITC) facility.
Most members of the Group of Ministers (GoM), which reviewed the tax structure for insurance, support the tax cut but believe that a full exemption could lead to increased costs due to the accumulation of input taxes. Industry experts argue that even at 5%, insurers may struggle to utilize tax credits and are advocating for a 12% output tax liability.
“We are not in favour of completely exempting life and health insurance premia from GST, but wish to reduce the rates. We have finalised our report… now it’s up to the Council to decide,” a GoM member said. Another member added, “A 5% GST on life and health insurance premiums would reduce the burden on policyholders.”
While some experts have suggested aligning the tax base with the concept of value-added tax—where GST is levied on premiums after deducting claims—such restructuring is unlikely.
In February, the insurance industry proposed to the Insurance Regulatory and Development Authority of India (IRDAI) and the Department of Financial Services (DFS) that GST on insurance premiums should be set at a minimum of 12%, with ITC benefits for insurers. They argued that input tax payments account for 8-11% of costs on term plans and should be offset through ITC. A reduction to 5%, they warned, would put the industry at a cost disadvantage.
Earlier this year, Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal told Financial Express that a complete exemption on insurance premiums could lead to higher costs, which contradicts the government’s objective.
Sources indicate that most GoM members are unlikely to accept the 12% rate, as it does not offer sufficient relief to policyholders. “The government wants to give relief, but a complete GST exemption is not the best solution. If insurance is fully exempted, companies won’t be able to claim tax credits, which could actually increase their expenses and, in turn, premium prices,” a source familiar with the matter said. “The GoM is considering a better solution—reducing GST to 5% while allowing companies to claim ITC,” he added.
According to sources, a complete exemption of term-life insurance from GST would cost the exchequer around ₹200 crore annually, while exempting senior citizens’ health insurance premiums would cost an additional ₹3,000 crore. Between FY22 and FY24, the government collected approximately ₹21,000 crore in GST from health insurance premiums.
