GoM Suggests Cutting GST on Health Insurance, Exemptions for Term Policies

A Group of Ministers (GoM) has recently recommended drastic changes to the current GST framework in India in the area of insurance products. Sources said the group has recommended a full GST exemption on pure term life insurance policies and a reduction in the GST rate for individual health insurance premiums from the current 18% to 5%. These recommendations are intended to make insurance more affordable and accessible, especially for vulnerable sections of society. The GoM has already submitted its report to the GST Council, which is to take up the proposals during its meeting on December 21. One important suggestion is to remove GST on health insurance policies made especially for senior citizens. However, there are no plans to change the GST rules for other insurance products like ULIPs.

The Finance Ministry had earlier made a case for why GST rates on life and health insurance premiums should be lowered.

Low rates would reduce the cost of insurance to consumers and could motivate more people to take up cover. Now, the GST on health insurance, term insurance, and ULIPs is held at 18%. A three-tier GST rate structure exists for endowment policies, where first-year premiums have a GST of 4.5%, while the subsequent years are at a GST of 2.25%. A GST rate of 1.8% is levied on single premium annuity policies. The proposal for the rationalization of GST rates for insurance has found supporters from all quarters. It has been welcomed by both the Financial Services Department and Irdai.

Irdai, in its submission to a parliamentary panel, has pointed out that many developed countries, including the European Union and Canada, exempt insurance products from VAT or GST. This international precedent strengthens the case for similar exemptions in India to boost insurance penetration. For example, besides stating that there is rising demand for affordable health care insurance, Irdai points out increases in life expectancy and skyrocketing healthcare costs as relevant considerations. The regulator asked that GST exemptions be accorded to micro-insurance policies, senior citizen health insurance, and term life up to a certain amount to bring relief to the most vulnerable demographics. It further identified an inconsistency in the taxation structure wherein medical services are exempt from GST, but premiums paid for insurance are heavily taxed. The anomaly has been pointed out as undue burden on policyholders. The Financial Services Department has also advocated reduction in GST on health insurance, especially for senior citizens and micro-insurance policies. These recommendations reflect a broader push to make insurance more accessible and to align India’s policies with global practices, thereby driving higher insurance adoption rates across the country.