GST On Insurance Premiums May Reduce From FY26

Mr Gadkari also articulated in his letter addressed to the finance minister, Ms Nirmala Sitharama that, "Levying GST on life insurance premiums amounts to levying tax on the uncertainties of life. The person who covers risks of life uncertainties to give protection to the family should not be levied a tax on premiums to purchase cover against the risks."

The Standing Committee on Finance also made a recommendation a year ago on health insurance, particularly retail policies for senior citizens, microinsurance policies (up to the limit prescribed by PMJAY), and on term insurance policies.

Several opposition parties also wrote to the finance minister on this issue, given that she heads the GST Council and hoping that some decision in this regard would be taken.

But in neither of the GST Council meetings, thus far, a decision to reduce the GST rate on health and life insurance has been taken.

Interestingly life insurance companies have opposed exempting the current GST rate of 18%, mainly in the case of term insurance policies. They've argued that the input tax credit -- which, as per their estimates, offsets 11% of the costs -- may be lost.

At present, life insurers claim costs or expenses on marketing, the IT Infrastructure, and marketing, among others, against the GST collected from policyholders. If they are unable to claim the input tax credit, they would be left with no option but to pass on the cost to policyholders by way of higher premiums. They are demanding a full input tax credit. Hence, as a middle ground, they have recommended reducing the GST rate to 12% on term insurance policies whereby the current price is maintained.

The Insurance Regulatory and Development Authority of India (IRDAI), too, has made its submission for a GST relief on the life and health insurance premiums.

As regards health insurance, the GST rate would likely be reduced to 5% on health insurance policies with coverage up to Rs 5 lakh.

The minutes of the last GST Council meeting state that while the issue was deliberated upon, the members of the GST Council from Maharashtra, Bihar, Madhya Pradesh, Uttar Pradesh, Punjab, Andhra Pradesh, Telangana, Kerela, Tamil Nadu, Chhattisgarh, and Meghalaya, have broadly concurred on reducing the GST rate on health insurance to 5% (from current 18%). However, most of them are of the view that it be done without any input tax credit, as they believe it will complicate the issue and affect the benefit to the middle class.

The members of the GST Council from Uttar Pradesh, Telangana, and Punjab proposed that senior citizens should be fully exempt from GST on health insurance.

On the other hand, the members of the GST Council from West Bengal, Goa, and Sikkim advocated for a total or full exemption of GST on health insurance premiums, emphasizing that it is the government's responsibility to make health insurance affordable and accessible for all. Sikkim's minister highlighted the significance of health for a prosperous India.

As per media reports, a Group of Ministers (GoM) on insurance in the GST Council is likely to meet in April 2025, i.e. at the beginning of the new financial year, to decide on providing GST relief on life and health insurance premiums.

Now, with the IRDAI also having given its comments, we hope the new financial year offers some relief to individuals currently paying high GST on life and health insurance premiums.

A fact is India's insurance penetration is significantly low compared to the global average of 7%. The annual report of the IRDAI points out a worrying drop in insurance penetration (measured as annual insurance premium as a percentage of GDP) to 3.7% in FY24 from 4.0% in FY23. This is the second consecutive year of decline after insurance penetration peaked at 4.2% in 2021-22 during the COVID-19 pandemic.

Low insurance penetration reflects that a large section of India's population still does not have insurance coverage, even though we are the fastest-growing economy with a so-called demographic dividend.

On per capita premium -- which speaks of insurance density -- while India has grown marginally to USD 95 in FY94 from USD 92 in the previous financial year, we are still far behind the global average of USD 899.

To conclude...

While it is anticipated that the government would provide relief to the common man by reducing the GST rate on life and health insurance premiums and that shall help increase the insurance penetration, make sure your insurance coverage is optimal.

Having a term life insurance and health insurance policies is integral to your financial planning.

To indemnify risk to life, a pure term insurance policy is the best option. The primary function of term life insurance is income replacement, ensuring beneficiaries can maintain their standard of living by covering essential expenses such as housing, education, and daily needs in the event of the policyholder's untimely death.

Hence, wisely calculate your Human Life Value (HLV), considering the following:

• Your life expectancy based on your family medical history

• The life expectancy of your spouse

• Number of children

• How old the children are, and how many years they'll be dependent on you

• Total number of dependents

• The financial goals you're addressing for the dependents

• Your monthly household expenses (excluding your personal expenses)

• Lifestyle expenses

• Total expenses of dependents

• Contingency reserve (if any)

• The assets you own

• Your outstanding liabilities (if any)

• Current insurance (if any)

• The cost of inflation

• ...and many other finer aspects

Likewise, in this day and age where healthcare costs are on the rise, have adequate health insurance coverage -- the higher the sum insured, the better it is.

If you have a corporate health insurance policy provided by your employer, keep in mind it cannot be your only line of protection.

[Read: Know Why Corporate Health Insurance Isn't Enough for Your Family Health Needs]

Having sufficient health insurance coverage reduces financial stress in case of medical emergencies and ensures that the investments assigned to accomplish the envisioned financial goals are not disturbed.

Note that adequate insurance adds to your financial security and paves the way for your happiness and prosperity in the years ahead.

So, make sure you have wisely insured yourself adequately -- for health and life.

Be thoughtful in your approach.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.