Health, Life Insurance Premiums Likely To Be Exempted From GST This Diwali

In a significant relief proposal for individual policyholders, the group of ministers on GST reform is set to recommend a complete exemption of goods and services tax on health and life insurance premiums under the revamped regime expected to roll out around Diwali.

The move could lower premiums by approximately 15%, effectively removing the 18% GST currently levied.

Ministers from various states convened in New Delhi on Wednesday for a crucial two-day meeting of the GoM, as part of the Centre’s broader push to overhaul the GST framework. The GoM on compensation cess was tasked with reviewing its future beyond the loan repayment deadline, while a separate GoM focused on insurance deliberated on reducing GST rates on individual health and life insurance premiums.

Finance Minister Nirmala Sitharaman addressed the GoMs, outlining the Centre’s broader plan to simplify the GST framework. According to the finance ministry, the next-generation GST will rest on three key pillars: structural reforms, rate rationalisation and ease of living.

"The ministers are of the view that all kinds of health and life insurance should be exempted from GST," said Bihar Deputy Chief Minister Samrat Choudhary, convenor of the GoM, following Day 1 of the meeting.

The GST Council, scheduled to meet from Sept. 18–19, will now review the GoM's recommendation. However, concerns remain over whether the tax cut will actually be passed on to consumers by insurers.

Besides, several states have expressed alarm over potential revenue loss. Telangana, for instance, anticipates a Rs 9,700-crore shortfall if exemptions are granted.

In FY 2023–24, combined GST collections from health insurance premiums totalled Rs 8,262 crore, with another Rs 1,500 crore collected from health reinsurance premiums, highlighting the fiscal significance of this category.

While the proposal seems beneficial on the surface, industry leaders have flagged critical challenges. They caution that removing GST without retaining input tax credit — which allows insurers to recover taxes paid on expenses like IT services, administration and distribution — could inflate their costs.

Without ITC, these backend taxes would become an added burden and insurers may pass the cost on to policyholders — reducing or even nullifying the benefit of GST exemption.

Saurabh Agarwal, tax partner at EY, said the proposal supports financial inclusion and healthcare access. But he added, "Since insurers won't be able to claim input tax credit on their expenses, consumers may see less than the full 18% reduction in premiums."

Experts suggest that a zero-rated GST structure (instead of a full exemption) would have been more effective, as it would allow insurers to claim refunds on input GST and transfer the full benefit to policyholders.

With the current compensation cess regime set to end by October, no alternative support system has been proposed yet — raising concerns among states.

Punjab Finance Minister Harpal Singh Cheema said, "The compensation cess, which helps repay back-to-back loans, is expected to end by October. The GoM was tasked with finding an alternative to prevent revenue loss for states like Punjab, which faces an annual shortfall of Rs 21,000 crore since GST rollout."

The GoM is expected to hold further deliberations on this in a separate session. 

Meanwhile, Day 2 of the GoM meetings, scheduled for Thursday, will focus on addressing inverted duty structures and rate rationalisation across sectors.

As part of broader reforms, the Centre has proposed a simplified GST rate structure with two main slabs — 5% and 18%, replacing the current 5%, 12%, 18%, and 28% system. A special 40% rate is also being considered for 5–7 items, including sin goods such as tobacco products.

At present, essential goods and food items fall under the nil or 5% categories, while luxury and demerit goods are taxed at 28%, often with an additional cess.

According to sources, Finance Minister Nirmala Sitharaman told the Group of Ministers that a two-slab GST structure would be beneficial for the economy and urged them to work proactively on driving GST reforms forward. She emphasised the importance of simplifying the tax regime to boost compliance, reduce litigation, and support economic growth, reinforcing the Centre’s commitment to implementing a more efficient and business-friendly GST system.