📌 Breaking Down the Proposal: GST on Insurance Set for a Major Revamp
The GST Council is likely to reduce the GST on insurance from the current 18% to 5%, according to reliable sources. This proposal—now under final review by a Group of Ministers (GoM)—would apply to health and life insurance, and retain input tax credit (ITC) for insurance companies.
This change aims to provide relief to policyholders without compromising the operational cost structure of insurers. While a full exemption was earlier considered, it is now seen as counterproductive, as it would block ITC, ultimately increasing premium rates due to the cascading effect of taxes.
💬 Why Not a Full GST Exemption?
At present, GST is levied at 18% on most life and health insurance products. However, insurance firms incur input costs (advertising, tech services, agent commissions) on which they pay GST, and this becomes a non-recoverable cost if insurance is made GST-exempt.
🧮 Insurance Industry’s Response: Support for 5% or 12% With ITC
Several insurers and industry associations, including those representing term insurance and health plans for senior citizens, have pitched for a 12% GST slab with full ITC, claiming that 5% may still lead to partial accumulation of unutilized credits.
🔍 Key Stats:
- Input taxes account for 8–11% of costs in term life plans.
- Estimated revenue loss from full exemption: ₹50,000 crore.
- Loss from proposed 5% with ITC: Approx. ₹36,112 crore.
- GST collected from health insurance (FY22–FY24): ₹21,000 crore.
📊 GST Options Compared
| GST Structure | Tax Rate | ITC Allowed | Impact on Premium | Govt Revenue Impact |
|---|---|---|---|---|
| Current Scenario | 18% | Yes | High | Neutral |
| Full Exemption | 0% | No | High (due to cost absorption) | ₹50,000 Cr loss |
| Proposed Reform | 5% | Yes | Low | ₹36,112 Cr loss |
| Industry Proposal | 12% | Yes | Moderate | Lower loss than 5% |
🧓 Special Relief for Senior Citizens?
In earlier deliberations (Oct 2024), the GoM considered:
- Full exemption for term life policies.
- GST waiver on health insurance premiums paid by seniors above 60.
However, the estimated revenue loss of ₹3,000 crore from senior citizen exemptions remains a concern. The Council will revisit this in its next meeting expected in April–May 2025.
🧾 What Policyholders Need to Know
If the 5% GST rate is approved:
- New policies will become more affordable.
- Insurers can retain ITC benefits, keeping premiums in check.
- Businesses offering group health/life plans may see reduced expenses.
If you’re a:
- 🧑⚕️ Professional: Your term/life policy will be cheaper with full benefits.
- 🏢 Business Owner: Group policy premiums can be part of cost-saving strategies.
- 👨👩👧👦 Individual Buyer: Annual premium outgo will reduce significantly.
- 👴 Senior Citizen: You may benefit from special exemptions (if approved).
✅ Final Take: A Balanced GST Reform for Insurance Sector
The government’s plan to reduce GST on insurance to 5% while retaining ITC is a middle-path solution that balances fiscal responsibility with consumer benefit. If approved, it will make insurance more accessible while preserving the operational efficiency of insurers.