The 58th GST Council meeting has once again deferred a decision on reducing the 18% GST charged on insurance premiums, despite sustained lobbying from the insurance industry and growing public demand for relief. The Council has referred the matter to a GoM for further study, with a report expected by June 2026.
The Case for Reduction
Insurance penetration in India remains among the lowest globally at approximately 4% of GDP, compared to the world average of 7%. Industry bodies argue that the 18% GST on health and term insurance premiums effectively taxes protection and creates a regressive burden on middle-class families who are trying to do the responsible thing by buying insurance. A family paying 25,000 per year for health insurance pays 4,500 in GST alone, money that could have been used to buy higher coverage.
The industry's proposal is a tiered approach: nil GST on term life insurance (which is pure protection with no investment component), 5% on health insurance, and the current 18% retained for investment-linked insurance products like ULIPs and endowment plans. This distinction would align India with global practices where life and health insurance are typically zero-rated or exempt from consumption taxes.
Government's Concern
The primary constraint is revenue. Insurance premiums currently generate approximately 21,000 crore annually in GST revenue for both central and state governments. A full exemption on health and term premiums would reduce this by an estimated 8,000-10,000 crore, a gap that would need to be filled from other sources. States, which receive their share of IGST on insurance, have been reluctant to agree to any reduction without compensatory revenue measures.
What This Means for Policyholders
For now, the 18% GST on insurance premiums continues. Policyholders claiming Section 80D deductions should note that the GST component is included in the eligible premium amount. This means on a 25,000 premium (inclusive of 3,813 GST), the full 25,000 is deductible under 80D, partially offsetting the tax burden. For those in the 30% tax bracket, the effective GST cost is reduced by about one-third through the tax deduction benefit.
The debate is likely to continue through 2026, with the GoM report and subsequent Council meeting expected to provide more clarity. Any change, if approved, would likely take effect from 1 January 2027 at the earliest.
Source
GST Council, Insurance Industry Bodies