GST Council likely to take up insurance tax relief at next meeting, GoM may stick to full exemption proposal

The Goods and Services Tax (GST) Council is likely to take up the long-pending issue of tax relief for life and health insurance premiums at its next meeting, possibly before the monsoon session of Parliament, people familiar with the development told Moneycontrol, with the Group of Ministers (GoM) likely backing a full GST exemption on term life insurance along with health cover for senior citizens.

The final comments by insurance regulator IRDAI have already been submitted before the council - seen as a key input - which was sought at the last meeting in December 2024 before a final decision is taken.

Government sources told Moneycontrol that the Group of Ministers (GoM) on insurance is expected to resubmit its previous recommendation, which had called for a full GST exemption on term life insurance premiums as well as health insurance premiums for senior citizens. The GoM had also recommended exempting GST on health insurance for policies of up to Rs 5 lakh, aimed at making insurance more affordable for the common man.

As of now, life and health insurance policies attract 18 percent GST, and the Centre has been considering a reduction in this rate, with industry stakeholders seeking a lower rate for better affordability and higher penetration. As per government estimates, the proposed exemptions could lead to a revenue loss of around Rs 2,600 crore annually, with nearly Rs 200 crore from term life cover and Rs 2,400 crore from health insurance premium exemptions. However, sources added that the expected gain in pan-India coverage is likely to outweigh the fiscal impact.

The insurance industry too had raised concerns over exemptions, highlighting the loss of input tax credit (ITC). Under the current system, insurers can offset taxes paid on inputs like IT infrastructure, marketing and administrative expenses against the GST collected from policyholders. Exemption would block this credit mechanism, forcing insurers to absorb the costs, potentially leading to higher premiums.

“…reducing the rate to 12 percent will not give enough benefit to the consumer, and lowering it to 5 percent would cause revenue loss through input tax credit,” one government source explained, adding, “the best option is to exempt.”

The push for GST relief is closely linked to concerns around India’s low insurance penetration. According to the Economic Survey 2024-25, insurance penetration in India is at 3.7 percent of GDP in FY24, well below the global average of around 7 percent. Full exemption is being positioned as a targetted step to improve affordability, and increase insurance coverage, particularly for vulnerable sections of the population such as senior citizens. 

The final decision now rests with the GST Council, which is likely to weigh the GoM’s proposal against industry feedback and fiscal constraints at the upcoming meeting, which may take place before the monsoon session of the Parliament commences.