New Delhi — The Goods and Services Tax (GST) Council is poised to debate a landmark proposal at its upcoming meeting this month that could slash or eliminate the 18% GST on life and health insurance premiums, potentially making essential coverage more affordable for millions of Indian households. Backed by the Insurance Regulatory and Development Authority of India (IRDAI), the move aims to address long-standing barriers to insurance penetration while aligning with the government’s goal of universal health coverage by 2047.
Key Proposals on the Table
The Group of Ministers (GoM) tasked with reviewing insurance taxation has recommended three critical exemptions:
Full GST Exemption for Term Life Insurance: Policies focused on pure risk protection, which currently face an 18% tax burden, could become tax-free. This would directly benefit middle-class families relying on term plans for financial security.
Senior Citizen Health Policies Exempt: Health insurance premiums for individuals aged 60 and above would be fully exempt from GST, addressing the healthcare needs of an aging population .
Partial Exemption for Health Coverage Up to ₹5 Lakh: Policies offering up to ₹5 lakh in health coverage would be GST-free, while higher-value plans would retain the 18% rate. This tiered approach balances affordability for basic healthcare with revenue considerations .
These recommendations, submitted to the GST Council in December 2024, follow extensive consultations with IRDAI and industry stakeholders. If approved, they could reduce annual premiums for a ₹10,000 term plan by ₹1,800 and a ₹30,000 family health floater by ₹5,400, based on current tax rates .
Expert Backing and Industry Implications
Insurance and tax experts have hailed the proposals as transformative. Hanut Mehta, CEO of BimaPay Finsure, emphasized the impact of a rate cut to 5%: “This would make health insurance premiums more predictable and accessible, particularly for low-income groups. A ₹50,000 health policy could see annual savings of ₹6,500, freeing up funds for other essential expenses” . Tax consultant Jignesh Ghelani of Dhruva Advisors added: “Lowering GST to 5% would harmonize insurance taxation with medical services, which are already GST-exempt, reducing financial disincentives for policyholders” .
IRDAI has further argued that aligning India’s tax structure with global practices—where countries like Canada and EU members exempt insurance from VAT—would boost consumer confidence. The regulator highlighted that while medical services are tax-free, the 18% GST on premiums creates a “regressive barrier” for vulnerable groups .
Revenue Trade-offs and Government Priorities
While the proposals could cost the exchequer an estimated ₹2,600 crore annually (₹2,400 crore from health insurance and ₹200 crore from term plans) , the government views this as an investment in long-term social equity. Finance Minister Nirmala Sitharaman has emphasized that the reforms align with the three pillars of GST rationalization: structural simplification, rate harmonization, and ease of living .
Critics caution that abolishing GST entirely could disrupt insurers’ input tax credit (ITC) mechanisms, potentially raising operational costs. However, phased reductions to 12% or 5%—as discussed in earlier council meetings—are seen as a balanced compromise .
Broader Context: India’s Insurance Gap
India’s health insurance coverage remains alarmingly low, with less than 40% of the population insured. Out-of-pocket medical expenses account for over 60% of healthcare spending, pushing millions into poverty annually . The GST relief comes amid a broader push by insurers to expand coverage, including the Life Insurance Council’s “Sabse Pehle Life Insurance” awareness campaign .
Analysts note that even incremental rate cuts could yield significant benefits. For instance, reducing GST on a ₹20,000 term plan from 18% to 5% would save policyholders ₹2,600 annually—a 13% reduction in premium costs .
Next Steps and Implementation
The GST Council’s decision, expected later this month, will hinge on balancing fiscal prudence with social welfare goals. If approved, the changes could take effect as early as October 2025, with insurers required to pass the full benefit to consumers .
For policyholders, the message is clear: Affordable, comprehensive insurance—a cornerstone of financial resilience—may soon be within reach. As the nation debates this pivotal reform, the outcome will shape the trajectory of India’s healthcare and social security landscape for decades.
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