An Examination of GST Implications for India's Insurance and Banking Industries: Current Rates and Effects

The Goods and Services Tax (GST) has significantly influenced the insurance and banking industries across India, impacting both premium costs and transaction fees. Recent policy discussions have centered on strategies to alleviate this financial burden and enhance the accessibility and affordability of these essential services. This article delves into the specific effects of GST on various insurance types—life, health, and general—as well as banking services, incorporating crucial updates from the 56th GST Council meeting.

Key Insights

• The 56th GST Council meeting sanctioned a GST exemption for individual life and health insurance, effective September 22, 2025.
• This exemption means individual life insurance products, including Unit-Linked Insurance Plans (ULIPs) and endowment schemes, along with health insurance policies such as family floaters and senior citizen plans, will now be subject to 0% GST, thereby enhancing their affordability.
• Banking sector services consistently incur an 18% GST rate, which has remained constant since its initial implementation.
• Common banking fees, such as those for ATM withdrawals, cash withdrawals at branches, and various transaction charges, continue to be taxed at an 18% GST rate.

GST on Life and Health Insurance

Life insurance policies are generally categorized into three main types:

• Term insurance plans: These are fundamental life insurance products offering pure risk cover.
• ULIPs (Unit-Linked Insurance Plans): These integrate both insurance coverage and investment opportunities.
• Endowment plans (including money-back policies): These provide a lump sum payout upon maturity or the policyholder's death, or regular fixed payments, similar to a pension.

Previously, service tax rates varied for these products. For instance, before GST, certain policies had the following service tax applications:

The implementation of an 18% GST rate superseded these previous service tax rates, leading to an increase in premiums. For life insurance services, the value of supply for GST calculation is determined as follows:

a) The gross premium paid, reduced by the amount allocated towards investment or savings for the policyholder, provided this amount is transparently communicated to the policyholder.

Consider this example:

| Particulars | Under Service Tax (INR) | Under GST (INR) |
| :-------------------- | :---------------------- | :---------------- |
| Gross Premium | 1000 | 1000 |
| Investment Portion | 600 | 600 |
| Life Insurance Portion | 400 | 400 |
| Service Tax @ 15% on 400 | 60 | —– |
| GST @18% on 400 | —– | 72 |

b) For single premium annuity policies, GST is applied to 10% of the premium.

c) In all other scenarios, GST is levied on 25% of the premium for the first year and 12.5% of the premium from the second year onwards.

Example calculation:

| Particulars | Value (INR) |
| :------------------- | :---------- |
| Gross Premium p.a. | 1000 |
| **First Year** | |
| 25% of value | 250 |
| GST @18% on 250 | 62.50 |
| **Second Year Onwards** | |
| 12.5% of value | 125 |
| GST @18% on 125 | 22.50 |

d) If the entire premium covers only life insurance, the 18% GST rate applies to the full premium amount.

Effects on Policyholders and Insurers

Both existing and new policyholders experienced higher premium costs as a direct result of the increased tax rates. Insurance providers, in turn, transferred these increased tax burdens to their customers. Insurers also encountered elevated compliance and administrative expenses due to the surge in GST return filings and the complexities arising from the taxation of services exchanged between their various branches.

General Insurance

General insurance encompasses various categories such as fire, marine, motor vehicle, and theft insurance. The standard GST rate applied to general insurance policies is 18%.

Effects

The increase in the tax rate from 15% to 18% led to higher premiums for general insurance policyholders. Corporate entities holding general insurance policies are eligible to claim input tax credit (ITC) on the GST paid, a benefit that also existed under the previous service tax regime. However, individuals with life and health insurance policies are generally not entitled to ITC, as these are considered personal expenses. Even corporate policyholders who offer group life and health insurance to their employees cannot claim ITC on these policies.

Certain life insurance schemes provided by the Government are exempt from GST:

• Janashree Bima Yojana (JBY)
• Aam Aadmi Bima Yojana (AABY)
• Life micro-insurance products approved by the Insurance Regulatory and Development Authority (IRDA) with a maximum cover of Rs. 50,000.
• Varishtha Pension Bima Yojana
• Pradhan Mantri Jeevan Jyoti Bima Yojana
• Pradhan Mantri Jan Dhan Yojana
• Pradhan Mantri Vaya Vandan Yojana
• Other state government insurance schemes officially notified by the Indian Government based on GST Council recommendations.
• Life insurance provided by the Central Government to personnel of the Army, Navy, and Air Force.

GST on No Claim Bonus

Following deliberations at the 48th GST Council meeting, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 186/18/2022-GST to clarify the GST treatment of 'No Claim Bonuses' (NCB).

Insurance providers commonly grant NCBs to policyholders who have not filed any claims during the policy term. This bonus is typically applied as a reward or discount when renewing the insurance policy, reducing the subsequent premium payable.

The Circular elucidates that an insured individual purchases an insurance policy to protect against potential losses or injuries, as per the policy's conditions. Policyholders are not contractually obligated to refrain from making claims during the insurance period. Consequently, the act of not lodging an insurance claim does not constitute a supply of service by the insured person to the insurance company.

In accordance with Section 15(3)(a) of the CGST Act, the value of a supply should exclude any discounts provided before or at the time of supply, provided these discounts are documented in the invoice. Therefore, a 'No Claim Bonus' is not deemed as consideration for any supply and is instead treated as a discount, which means GST is not applicable to it.

GST on Banking Services

Previously, banking services were subject to a 15% service tax, which subsequently increased to 18% under the GST regime. This increment made banking services more costly for consumers. Most banks impose transaction fees for cash withdrawals from different bank ATMs and branch withdrawals (though the first five transactions for both are often free), and all such charges are subject to 18% GST.

Implications for Banking Companies

Banking institutions typically transfer their tax obligations to their clientele. Nonetheless, their administrative and compliance efforts have escalated significantly. Services exchanged between different bank branches are taxable under GST, although these entities can later claim input tax credit. This situation leads to increased paperwork and consequently, higher operating expenses. Business clients, however, benefit from the ability to claim input tax credit on GST paid for banking services associated with their business accounts.

Conclusion

In summary, the implementation of GST has resulted in elevated insurance premiums for all policyholders. An average family holding life, health, and car insurance could see an approximate 3% increase in their annual insurance expenditures. For instance, if a family's yearly insurance spending, excluding service tax, was Rs. 30,000, their costs would rise by Rs. 900 due to the 3% increase.