GST Council may allow employers to claim ITC on employee insurance premiums

The GST Council is expected to consider a proposal on October 7 to allow employers to claim input tax credit (ITC) on premiums paid for life and health insurance provided to employees, a move that could lower the cost of workplace insurance and encourage businesses to widen coverage.

At present, group insurance policies purchased by businesses for their employees attract 18% GST. Employers, however, are generally unable to claim credit for the tax paid on such policies, effectively making the GST component part of the cost of providing insurance benefits to their workforce.

ITC relief proposed

The proposal before the GST Council would allow businesses to claim credit for GST paid when purchasing eligible insurance coverage for employees.

If approved, the change would reduce the effective cost borne by employers because the tax paid on the insurance premium could be adjusted as input tax credit rather than remaining an unrecoverable expense.

“This will make insurance cheaper for every employer to provide,” sources said.

The proposal is significant for organised-sector businesses, many of which provide group health or life insurance as part of their employee benefit packages.

Current 18% burden

Under the existing framework, 18% GST is levied on group insurance policies purchased by employers. Restrictions on ITC mean businesses cannot ordinarily offset this tax against their GST liabilities.

For instance, if an employer pays Rs 10 lakh as the taxable premium for an eligible group insurance policy, the 18% GST component amounts to Rs 1.8 lakh. Without ITC, that tax becomes an additional cost to the employer.

Allowing credit would not necessarily mean the GST itself disappears. Instead, eligible businesses would be able to use the tax paid on such insurance as credit against their output GST liability, subject to the conditions ultimately approved.

Push for wider coverage

The proposal is also being considered from the perspective of expanding insurance coverage among employees.

Since group insurance is widely provided by organised employers, reducing the effective cost could encourage companies to maintain or enhance the benefits offered to workers. It could also make it easier for smaller businesses to provide insurance where cost has been a constraint.

Lowering the effective tax burden could potentially allow employers to increase the sum insured, cover more employees or extend benefits to dependants, depending on individual company policies.

Insurance industry may benefit

A wider ITC facility could also benefit insurers if lower effective costs encourage more companies to purchase or expand group insurance policies.

Employer-sponsored health insurance forms an important layer of financial protection for workers, particularly because medical expenses can create a substantial burden for households.

Group policies can also offer employees access to insurance at rates and conditions that may differ from individually purchased coverage because risks are pooled across a larger workforce.

Council to decide

The proposal will be considered by the GST Council when it meets on October 7. Any final relief will depend on the Council’s decision and the precise conditions attached to the ITC facility.

If approved, the change would address a long-standing cost associated with employer-provided insurance by allowing eligible businesses to recover the GST paid on premiums through the input tax credit mechanism.

The measure could consequently reduce the effective cost of providing workplace insurance while supporting wider life and health coverage among employees in the organised sector.