By the enactment of the Goods and Service Tax (GST) regime in July 2017, the Indian government significantly changed the taxation structure. The goal of the project was to consolidate the tax system and increase the transparency by combining several indirect taxes into a single taxation framework. Although GST has different effect across sectors, including health and life insurance.
The nuanced effect of GST on health and insurance is examined here:
Taxation framework for Insurance
Under the pre-GST regime, insurance premiums were subject to a service tax at a standard rate of 15%:
- Service Tax: 14%
- Swachh Bharat Cess (SBC): 0.5%
- Krishi Kalyan Cess (KKC): 0.5%
By contrast, the GST regime introduced a unified tax rate of 18% on insurance premiums, split equally between:
- SGST (State GST): 9%
- CGST (Central GST): 9%
Comparison of Tax Regimes with Examples
For example, a person purchasing an insurance policy of ₹30,000 basic premium. Calculation of tax as under:
- PRE GST – TAX REGIME
| Type of Tax | Percentage | Amount |
| Service Tax | 14 % | ₹30,000*14% = ₹4200 |
| Swacch Bharat Cess | 0.5 % | ₹30,000*0.5% = ₹150 |
| Krishi Kalyan Cess | 0.5 % | ₹30,000*0.5% = ₹150 |
| Final Tax Amount | 15% | ₹4500 |
Final cost of the person purchasing the policy is ₹30,000 (Basic Premium Amount) + ₹4500 (Tax levied) = ₹34,500
- IN GST – TAX REGIME
For the same insurance policy with a net premium of ₹30,000:
| Type of Tax | Percentage | Amount |
| SGST | 9% | ₹30,000*9% = ₹2700 |
| CGST | 9% | ₹30,000*9% = ₹2700 |
| Final Tax Amount | 18% | ₹5400 |
Final cost of the person purchasing the policy is ₹30,000 (Basic Premium Amount) + ₹5400 (Tax levied) = ₹35,400
Here we can see that a person purchasing a plan costing ₹30,000 would incur tax of ₹4500 in older tax regime compared to ₹5400 in the new tax regime. This result in increase in total cost of ₹900 which can sometime create huge impact on the citizen resultant of a modest increase in the price of the premium plan.
Impact on Health Insurance
1) Increase in premium cost
With the transition to GST (Goods and Services Tax), plans have become expensive thereby raising the cost of actual premiums. It has been implied that after this increase, most people from the middle – and lower-income groups will shy away from taking policies and thus decrease their total coverage.
2) Impact on Corporate Health Insurance
Due to a higher rate of GST a few businesses are unable to procure health coverage for their employees. Larger companies might handle the expense, but the tight budgets of small and medium-sized businesses may not be able to accommodate this rise in cost.
Due to this, some companies will reduce the scope and benefits of these policies by offering mini-coverage and lesser add-ons for the price. Employee satisfaction can be sacrificed due to this.
3) Impact on Life Insurance
Term Plan
Term life insurance is a specific type of life insurance that provides financial security for a specified period. This means when the insured passes away during this tenure, the death benefit goes to the beneficiary. Such plans became less attractive due to higher insurance premium resulting from higher GST rates.
Endowments Plans
Endowment plans combine the benefits of investments or savings with life insurance. The nominee gets the sum promised if the policyholder dies within the policy’s term. On the other hand, the policyholder receives the amount guaranteed at maturity plus any applicable incentives if they live. These insurances also have a larger tax responsibility under the GST regime, which raises the total cost to policyholders and may make them less affordable.
Unit Linked Insurance Policy or ULIPs
By fusing investment options with life insurance coverage, unit linked insurance policies, or ULIPs, provide policyholders with two benefits. Depending on the structure of the policy, these plans permit systematic investments in debt funds, equity, or a combination of the two. In addition to life insurance cover, ULIPs offer policyholders the benefit of wealth growth. Despite being a popular option, the GST system has raised the cost of ULIPs because of higher taxes, which may have an impact on policyholders’ capacity to purchase and be drawn to them.
Annuity Plans
Annuity plans are made to help people plan for retirement by allowing them to invest in the form of lump sum payments or periodic payments. During the policyholder’s retirement years, the accrued funds are then utilized to produce consistent returns. However, the overall cost of these plans has increased due to the GST-induced taxation hike, which may deter some people from selecting them for their retirement plan.
Consumer Perception and Behavioral Shift
1) Reluctance to Purchase
People with fixed incomes or limited funds may no longer afford insurance plans due to the higher premiums under the GST regime. Despite the fact that Section 80D (for health insurance) and Section 80C (for life insurance) of the Income Tax Act offer some tax benefits, middle- and low-income groups continue to be greatly concerned about the total cost of these plans.
2) Shifts Towards Customization
Prospective customers are increasingly looking for specialized insurance products in response to growing expenses. By removing extraneous features and adding required add-ons, these customized policies enable people to lower the cost of the coverage without sacrificing important benefits.
3) Preference for Long – Term Policies
In order to lock in current GST rates and lessen the effect of inflation on premium costs, many policyholders are increasingly choosing long-term insurance contracts. Long-term plans offer more financial stability over time in addition to lowering the frequency of GST payments.
Global Perspective on Insurance Taxation: Learning from Other Countries
As per National Health Account data the out-of-pocket expenditure (OOPE) is still around 39.4% of total health expenditure as of the year 2021-22 one of the reasons for which is high tax on the insurance plans which make the plans less affordable for the society.
In India the tax imposed on Insurance premium plan is highest in the world. In countries like Singapore and Hong Kong insurance plans are exempted from their tax regime resulting in attractive and affordable insurance plans.
The high GST rate resulted in low contribution in the insurance sector in India, which was only 4% in the financial year 2022-23, lower than the global average of 7%.
Lowering the GST could encourage more people to purchase insurance, aligning with the goal of “Insurance for All by 2047” a goal set by the Insurance Regulatory and Development Authority of India (IRDAI).
Way Forward
A thorough approach is needed to achieve the goal of “Insurance for All by 2047” a goal set by the Insurance Regulatory and Development Authority of India (IRDAI). Reducing the GST rates which is currently at 18% with certain exception and for some insurance plans would lead to acceptance by middle and lower-income segments to its acceptance as it would increase the affordability and accessibility.
For empowering an individual to make an informed decision a financial literacy campaign needs to be organized focusing on the positive effect and tax benefits from insurance plan under Section 80C and 80D of the Income Tax Act.
Private players in the market can excel by providing the plans tailoring the needs of the consumer. This approach resulting in the customizable product would promote corporate health insurance and can provide tax benefits resultant of customized plans curbing the growing demand.
India should get inspiration form countries like Singapore and Hong Kong where insurance policy is exempted from the taxation system in order to provide maximum benefit to the citizen.
The formation of Group of Ministers(GoM) under the chairmanship of Samrat Chaudhary, Deputy Chief Minister of Bihar, was a promising approach by the government. The GoM was set up with the task of examining GST on life and health insurance. In its first meeting on 19 October 2014, in New Delhi the discussion on the issue of GST rate was there exploring the strategies for making the insurance more inclusive and affordable for all.
Author: Soumya Agrawal, law student at Institute Of Law, Nirma University
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Link to Official Government GST Portal: https://www.gst.gov.in
