The GST Council may soon consider a proposal to eliminate the 18% Goods and Services Tax on health insurance policies of up to Rs. 5 lakh. This potential move could significantly ease the financial burden for India’s middle-class families and make health insurance more accessible. With the health insurance penetration in India still relatively low, the removal of GST could be a step toward greater inclusion, particularly for the elderly and economically weaker sections.
Health insurance policies up to Rs. 5 lakh may get tax exemption
According to official sources, the Group of Ministers (GoM) assigned to examine insurance-related matters has recommended a full GST exemption for health insurance policies up to Rs. 5 lakh. This recommendation will likely be discussed in the upcoming GST Council meeting.
Currently, health and life insurance policies attract 18% GST, which adds a substantial cost to policy premiums. Removing this tax burden can make insurance more affordable for middle- and lower-income families.
What will change for policyholders?
Eliminating GST on these insurance plans would result in an 18% drop in total payable premiums. This could translate into tangible savings for families and individuals already struggling with increasing medical costs.
Hannut Mehta, CEO and co-founder of Bimapay Finsure, stated, “Removing GST on health policies up to Rs. 5 lakh can make health insurance more accessible to crores of families in India. This can lead to a rapid increase in the number of first-time insurance buyers in tier-2 and tier-3 cities. It is a move that will improve both customer acquisition and policyholder retention.”
Such a measure is expected to enable insurers to design simpler and more affordable plans for mass consumption, further expanding coverage and awareness.
Implications for senior citizen health insurance
Another key recommendation involves scrapping GST on term life insurance premiums for senior citizens. Individuals above 60 years face high insurance premiums due to increased risk. The 18% GST makes it even more difficult for them to afford adequate coverage.
“Making life insurance accessible to India’s elderly population is one of the biggest needs of today. For people above 60 years of age, the 18% GST on term insurance significantly increases their premium cost. Removing the tax will be a big step towards providing financial security to this class,” Mehta added.
This tax break could act as a safety net for many retired individuals and senior citizens, offering them the much-needed financial protection without the added cost burden.
Expected revenue loss and government’s stand
Media reports indicate that the proposed exemption could lead to a revenue loss of approximately Rs. 2,600 crore annually. Out of this, around Rs. 2,400 crore may result from removing GST on health insurance, including senior citizen health insurance, while Rs. 200 crore could be due to term life insurance for senior citizens.
CA Mandar Telang, Secretary of the Bombay Chartered Accountants Society (BCAS), noted, “The government has previously exempted certain insurance schemes from service tax. A similar exemption for premium-based health and life insurance policies could be considered.”
He also highlighted that insurance companies might lose input tax credit due to the GST removal. However, the overall impact would be favourable to consumers as it reduces costs and enhances insurance penetration.
Policy alignment with social welfare goals
The Indian government has long advocated for increased insurance penetration, yet the current level remains at just 3.7% of GDP—significantly below the global average of 7%. By exempting health insurance policies up to Rs. 5 lakh from GST, the government could promote its objective of “insurance for all.”
A government official remarked, “Making GST 12% will not benefit the common man much, and making it 5% will result in a loss of input tax credit. The best option is to give full exemption.”
If accepted, the proposal would align closely with existing welfare goals and help bridge the accessibility gap, especially in rural and semi-urban areas.
Industry response to GST exemption proposal
The insurance industry has responded positively to the possibility of GST exemption. Many believe that such a move could rejuvenate interest in basic health plans and encourage more families to adopt insurance protection.
Insurers are also expected to gain new opportunities to create simplified, lower-cost policies, particularly for tier-2 and tier-3 cities. As these policies become more affordable, customer acquisition is likely to rise.
However, experts warn that while the consumer benefits are evident, insurance providers may face operational challenges in managing cost structures without the advantage of input tax credits.
Awaiting the GST Council’s final decision
The final call lies with the GST Council, which must weigh the potential revenue loss against the long-term socio-economic benefits of a GST exemption. The Council’s decision will likely take into account the opinions of industry stakeholders, public welfare concerns, and regulatory guidance from the Insurance Regulatory and Development Authority of India (IRDAI).
The IRDAI had submitted its final views to the GST Council following a request during the December 2024 meeting, and those comments are expected to be instrumental in shaping the final outcome.
This pivotal meeting could be scheduled ahead of the monsoon session of Parliament, with a decision possibly arriving in the coming weeks.
What this means for the common Indian
If approved, the GST exemption on health insurance premiums up to Rs. 5 lakh could mark a significant shift in public policy. For the average middle-class family, this could mean:
- Reduced premiums by 18%, making health coverage more affordable
- Higher adoption of first-time insurance policies, especially in semi-urban and rural areas
- Greater coverage for senior citizens without added tax burden
- A potential uptick in demand for term life insurance among older adults
- Momentum toward achieving universal health insurance access
In summary, the proposal to remove GST on select health insurance policies has the potential to deliver far-reaching benefits to middle-income families and the elderly. While revenue implications remain a concern, the long-term gains in public health and financial security may outweigh the costs.
The GST Council now holds the key to unlocking this major relief. If approved, this change could usher in a more inclusive, affordable, and robust insurance landscape in India.
