ITC Restrictions to Be Removed on Health and Life Insurance

The GST Council has recommended removing the block on Input Tax Credit (ITC) for health and life insurance. Once the law is amended, a registered business that buys group health or group life cover for its employees will be able to set off the 18% GST on the premium against its own GST liability.

The change is not in force yet. Until Parliament amends Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017 and the states amend their own GST laws, the GST paid on these premiums remains a cost for most employers.

What has the GST Council recommended on insurance ITC?

At its 57th meeting in New Delhi on 8 October 2026, the GST Council recommended amending Section 17(5) of the CGST Act to remove the restrictions on ITC for health and life insurance. The same recommendation covers outdoor catering, telecommunication towers, pipelines laid outside factory premises, free samples and goods destroyed or written off on expiry of shelf life. The Council said the change will reduce tax cascading and allow ITC to flow more smoothly across the supply chain.

A Council recommendation does not change the law on its own. The press release states that its decisions take effect only through circulars, notifications or law amendments, and only those carry the force of law.

Why is ITC on health and life insurance blocked today?

Section 17(5)(b) of the CGST Act lists life insurance and health insurance among blocked credits. A business that pays GST on these premiums cannot use that tax to reduce its output GST, so the 18% becomes part of the policy cost.

The law allows the credit in only two situations:

• The business uses the insurance to make an outward taxable supply of the same category, or as part of a taxable composite or mixed supply. An insurer buying reinsurance is the common example.
• A law in force requires the employer to provide cover to its employees.

Most employers buy group health and group term cover as a voluntary employee benefit. Neither exception applies to them, so the GST on these premiums has stayed a sunk cost.

Which insurance policies will the change affect?

The change mainly affects group insurance policies that businesses purchase for their employees, as individual life and health insurance policies have been exempt from GST since 22 September 2025, following the 56th GST Council meeting. With no GST charged on these individual policies, there is no input tax credit (ITC) to claim.

Policies that generally continue to attract 18% GST and may fall within the proposed change include:

• Group health insurance for employees
• Group term life insurance for employees
• Other taxable group life or health insurance policies that businesses purchase for their employees

The precise scope of the ITC relief will depend on the final amendments to Section 17(5) of the CGST Act, including the treatment of insurance cover extended to employees’ dependants.

When can businesses start claiming this ITC?

No effective date has been announced. Section 17(5) is part of the CGST Act, so the Parliament must pass an amendment, and each state must amend its State GST Act before the credit becomes available. Recent changes to Section 17(5), such as those on corporate social responsibility spending in 2023 and on ‘plant or machinery’ in 2025, came through the annual Finance Act. The government has not said which route it will take this time.

Two questions remain: the government has not said whether the change will apply to premiums paid before the notified date, or how a policy running across the effective date will be treated.

Until the proposed change takes effect, do not claim ITC on group insurance premiums unless an existing legal exception applies. If ineligible ITC is claimed, it must be corrected. Interest under Section 50(3) applies when wrongly availed credit has also been utilised, and a demand or penalty may follow under the provision applicable to the relevant financial year. For FY 2024–25 onwards, that demand provision is Section 74A.

What conditions must a business meet to claim ITC?

Removing the block only makes the credit eligible. The business will still have to meet the following general conditions in Section 16 of the CGST Act:

• The policy and the tax invoice are in the business’s name and carry its GSTIN.
• The insurer has reported the invoice, and it appears in the business’s GSTR-2B.
• The insurer has paid the tax to the government.
• The business has filed its GSTR-3B.
• The claim is made by 30 November after the end of the Financial Year (FY) or the date of filing the annual return, whichever is earlier, as Section 16(4) requires.

Businesses registered in more than one state need one more check. When the insurer bills the head office for a policy that covers staff in several states, the head office must pass the credit to each branch through an Input Service Distributor (ISD) registration. ISD registration has been mandatory for such common input services since 1 April 2025.

Which businesses may not benefit from the change?

The amendment will help registered businesses that make taxable supplies. Some businesses will see little or no gain:

• Composition taxpayers cannot claim ITC on any purchase under Section 10.
• Businesses making only exempt supplies, such as many healthcare and education providers, cannot claim ITC.
• Businesses making both taxable and exempt supplies must reverse the share of common credit linked to exempt turnover under Rule 42 of the CGST Rules.
• Banks and Non-Banking Financial Companies (NBFCs) that opt for Section 17(4) can take only 50% of eligible ITC each month.
• Cover bought for a proprietor, partners or their families counts as personal consumption, which Section 17(5)(g) blocks separately.

How much can a business save on group insurance?

Take a manufacturer in Pune with 40 employees that pays ₹6,00,000 a year for group health cover. GST at 18% adds ₹1,08,000 to the bill.

The credit reduces the GST the business pays in cash. It is not a refund. A business with low output GST will see the credit build up in its electronic credit ledger and can use it against future liability.

What should businesses do before the amendment is notified?

Taking a few steps now will make the claim simple once the law changes:

1. Record group insurance premiums and their GST in a separate expense ledger.
2. Ask the insurer to issue the policy and invoice in the business’s name with the correct GSTIN.
3. Match insurer invoices with GSTR-2B every month and follow up on missing ones.
4. Keep treating the GST on these premiums as ineligible until the notification is issued.
5. Read the notified amendment for its effective date and any limits before changing the ledger’s ITC treatment.
6. Compare policy renewal dates with the effective date, since the invoice date will decide which rules apply.

Conclusion

The credit on group health and life insurance has been recommended but is not yet law. When it arrives, it can cut the cost of employee cover by the full 18% GST for a fully taxable business. Businesses that gain from day one will be those whose policies are in their own name, whose insurer invoices appear in GSTR-2B and whose books keep these premiums separate from other expenses. Claiming before the notification exposes a business to interest and penalty, so prepare the records now and claim only from the effective date.

With TallyPrime, you can keep group insurance premiums in a dedicated expense ledger with GST details, record whether the tax is eligible for ITC and reconcile insurer invoices with GSTR-2B before filing GSTR-3B. Once the amendment is notified, updating the ledger’s ITC treatment from the effective date lets the credit reach your returns from the correct period.