The Goods and Services Tax (GST) Council has recommended allowing businesses to claim input tax credit (ITC) on GST paid on group health and life insurance policies taken for employees.
The recommendation, made at the Council’s 57th meeting, seeks to remove an existing restriction that prevents most employers from claiming credit on these expenses.
The move also addresses a difference in tax treatment between individual insurance policies, which have been exempt from GST since September 2025, and employer-sponsored group policies, which continue to attract 18 percent GST.
What exactly has the GST Council decided?
The Council has recommended amending Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017, to remove restrictions on claiming ITC on health and life insurance, among other specified expenses.
Under the existing framework, businesses generally cannot claim credit on group insurance premiums, subject to certain exceptions. As a result, employers absorb the GST paid on these policies as an additional cost.
However, the recommendation will take effect only after the relevant legal changes are notified. The proposal does not exempt group insurance from GST but seeks to allow eligible employers to recover the tax through ITC.
How does the change work?
ITC allows GST-registered businesses to offset eligible tax paid on purchases against GST payable on their taxable supplies.
For example, a company paying an annual group insurance premium of Rs 10 lakh would pay an additional Rs 1.8 lakh as GST at 18 percent, taking the total to Rs 11.8 lakh.
If eligible to claim and utilise the full Rs 1.8 lakh as ITC, the company’s effective insurance cost could fall to Rs 10 lakh. The actual benefit will depend on the final rules and the employer’s ability to use the credit.
Why is this important for MSMEs?
According to experts, smaller businesses must balance employee benefits with operating expenses, wage costs and cash-flow constraints, unlike larger companies that may have dedicated budgets for group insurance.
The inability to recover GST adds to insurance costs and could discourage some employers from offering cover or limit the benefits they provide.
The proposed relief could help MSMEs in three ways. First, it could lower the effective cost of existing employee insurance, freeing up funds for other business needs.
Second, it could encourage smaller manufacturers, retailers and service providers to offer group insurance by making policies more affordable.
Third, lower costs could help MSMEs compete for talent by giving them greater flexibility to provide health and life cover as part of employee compensation.
However, the change will not automatically lead to lower premiums or wider coverage. The benefits will depend on employers’ eligibility for ITC and whether they use the savings to improve employee benefits or reduce costs.
What does it mean for employees?
Employees will not automatically receive a GST refund or a reduction in their insurance premiums. The immediate benefit accrues to the employer purchasing the policy.
However, lower insurance costs could give companies more room to improve employee benefits. They could increase the sum insured, extend coverage to dependants or introduce additional health benefits.
Employers could also retain existing coverage and use the savings to reduce costs. Therefore, any improvement in employee benefits will depend on individual company decisions rather than being guaranteed by the tax change.
What should businesses watch out for?
Businesses should consider six key factors before factoring the proposed relief into their budgets.
Effective date: Employers must establish when the amendment takes effect and whether transitional provisions apply.
Family coverage: The eligibility of premiums covering employees’ spouses, children and other dependants will depend on the final legal provisions.
Utilisation of credit: Claiming ITC does not necessarily mean an immediate cash saving. Businesses must be able to utilise the credit under applicable rules.
Existing exceptions: Employers already eligible for credit under statutory exceptions will need to assess how the revised provisions affect them.
Insurer pricing: The reform does not require insurers to reduce premiums. Actual savings will depend on policy terms and market conditions.
