GST 2.0– A big decision was taken in the 56th meeting of the GST Council regarding insurance. Now the GST on health and life insurance premium has been reduced to zero. This rule will come into effect from September 22, 2025. Till now 18% GST was levied on insurance premium. This means that if you pay a premium of Rs 100, you had to pay Rs 118. But now the council has completely abolished the GST on insurance premium. But it has not become as cheap as it appears.
First know what was the decision?
The government wants insurance to become affordable for everyone. Therefore, it has been decided to make GST zero. This will make it easier for people to buy health insurance, life insurance, term insurance etc. and more and more people will take advantage of it. According to the new rule, now GST will not be levied on all individual insurance like ULIP plan, family floater plan and term plan.
The government reduced GST on insurance premium to zero but did not take any decision on input tax credit (ITC). When insurance companies sell us policies, they charge us 18% GST. But they also pay GST for their operations. Such as paying commission to agents, marketing, paying office rent, etc. According to GST rules, insurance companies can deduct the tax paid on these expenses from the tax collected from us and give the remaining amount to the government. This is called input tax credit (ITC).
Understand the calculation
Suppose the insurance company received Rs 100 as premium. Out of this, Rs 40 was spent on office rent, Rs 10 on electricity bill and Rs 30 on agent’s commission. In this way, the total GST expense of the company was Rs 70, because GST is not levied on electricity.
Now the insurance company pays 18% GST on these expenses. That is, 18% of Rs 70 is about Rs 12.6. In such a situation, the insurance company deducts this GST of Rs 12.6 from the GST of Rs 18 taken from us. After adjusting ITC, the company’s net GST liability remains only Rs 5.4, which it has to pay to the government.
What if there is no exemption on ITC?
If GST on insurance premium becomes zero, then insurance companies will not get ITC either. Many experts believe that by not getting ITC, insurance companies can recover this loss from the customers. That is, the burden of this will fall on the customer taking insurance.
Customers will not get full benefit
This means that the premium and GST combined which is currently Rs 118 may have to be paid, if GST is zero then it may be Rs 112.6. This means that even after GST on insurance becomes zero, customers will not get the full benefit of it. However, the financial burden on customers will be less than before.
What about those with old policies?
The government’s decision will also benefit those who have old policies. Since these new rules will be implemented after September 22, customers will benefit only after that. On the other hand, those insurances which are renewed every year or after two-three years (like health insurance), such customers will get less benefit after policy renewal. Since insurance companies will not get ITC claim, they can increase the premium a little. However, the premium will still be less than before.