How GST Affects Insurance and Banking Services in India

Goods and Services Tax (GST) has been one of the biggest indirect tax reforms in India, bringing many sectors under its purview — insurance and banking being among the key ones. These sectors are deeply linked to both consumers and businesses, so changes in their tax treatment have wide ripple effects: on premiums, service charges, profitability, and affordability.

Over time, the government has modified how GST applies to various kinds of insurance (life, health, general) and banking services. The most recent major set of changes came with the 56th GST Council meeting in September 2025, which brought in fresh exemptions and rate shifts. This blog walks through how GST works (or worked) for insurance and banking, what the 56th meeting decided, and what those decisions mean in practice.

Section 17(4) of CGST Act: Key GST Rules for Banks and NBFCs

• Simplified ITC Method: Instead of segregating input services used for taxable and exempt supplies, these entities can follow a special method.
• 50% ITC Rule: They are eligible to claim 50% of the total input tax credit (ITC) on inputs, input services, and capital goods in a tax period.
• Balance ITC Lapses: The remaining 50% of ITC automatically lapses and cannot be claimed.
• Ease of Compliance: This provision reduces the compliance burden, as banks and insurers deal with complex transactions that involve both taxable and exempt supplies.
• Trade-off: While it simplifies compliance, it also restricts the full utilization of ITC, which can impact overall tax efficiency for financial institutions.
• Applicability: This section applies to banking companies, financial institutions, and NBFCs.

GST on Insurance & Banking Pre-56th Meeting

Before the recent changes:

• Most insurance premiums (life insurance, health insurance, general insurance) were subject to 18% GST.
  
  
• Banking services (for example, ATM charges, transaction fees, branch cash withdrawals) also carried 18% GST.
  
  
• In insurance, there were often nuances: parts of insurance contracts might be investment or savings portions (for life insurance / ULIPs), and only the “insurance service” component was taxed.
  
  
• Input Tax Credit (ITC) was available to insurers and banks for their expenses that attract GST (rent, office expenses, commissions, etc.), which helps reduce their cost burden. This was true so long as the service being provided was taxable under GST.

What the 56th GST Council Meeting Changed

The 56th GST Council meeting, held on 3rd September 2025, introduced major changes in how GST applies to certain insurance services. These changes are effective from 22 September 2025.

Here are the key changes:

1. GST Exemption for Individual Life & Health Insurance Premiums
   Services of life insurance and health insurance provided to individuals (or families under individual policies) are now free from GST (i.e. at 0%) for both direct policies and reinsurance thereof. This includes senior citizen/family floater health policies, term life, ULIPs, endowment etc.
   
   
2. Definition of “Individual / Family” vs “Group”
   The exemption is only for individual/family insurance policies. Insurance where the insured are part of a group (such as employer-employee groups, group insurance schemes) remains taxable under the old rate (unless other exemptions or rate changes apply) i.e. at 18%.
   
   
3. Effect on Reinsurance
   Reinsurance of life/health policies under individual/family contracts is also exempted.
4. Banking Services
   There is no change, as of now, to the GST rate on typical banking service charges; these continue to attract 18% GST. Transaction-fees, ATM & cash withdrawal charges etc., remain taxable.
   
   
5. Miscellaneous Clarifications
   
   
   • The government clarified through notifications (CBIC) and supporting materials how “group insurance” is to be identified (e.g. employer-employee, non-employer-employee groups) so there is less ambiguity.
     
     
   • The notifications (e.g., Notification No. 16/2025 etc.) implement these changes under the CGST, UTGST, and IGST Acts, and set the effective date of change to 22 September 2025.

Implications of These Changes

These changes carry several important implications for policyholders, insurance companies, and regulators.

For Policyholders (Individuals, Families)

• Lower Premiums: For life and health insurance policies under individual/family category, the removal of 18% GST ought to reduce the premium amount (or keep it same but more benefits for the same cost). This increases affordability.
  
  
• Group Insurance: No relief under these changes — group policies still face 18% GST, so people covered under employer-provided schemes will not benefit directly.

For Insurers

• Revenue & Cost Adjustments: The change to nil GST for individual health and life insurance must be accounted for in pricing, reserving, profitability etc. 
• Compliance & Notifications: They need to adjust billing/invoice systems, policy documents, tax ledgers and reporting to reflect new rates, ensuring policies are correctly classified (individual vs group etc.).
  
  
• Potential Strain on Margins: In the case of exempt classification, inability to claim ITC might put upward pressure on other costs, which insurers might try to recover via higher service or administrative charges somewhere else, or by redesigning policies.
  

For Banking Sector

• Status Quo for Most Services: Since banking services remain taxed at 18%, there is no direct tax relief on most transaction charges, fees, ATM / branch withdrawal etc. Will continue to bear GST in customer charges.
  
  
• Since banking is a more standard service sector, ITC for inputs remains relevant (as long as service is taxable) - so banks may still benefit from cost offsets.

What Remains Unchanged or Needs Attention

• Banking service GST rate remains 18%. No change has been announced currently for that.
  
  
• Group insurance policies are still taxed under GST (18%) — no exemption announced for those in the 56th meeting.
  

Rate Rationalisation, GST 2.0 & GST Slab Changes

Though this blog is focused on insurance & banking, it helps to see these changes in the larger reforms underway:

• The 56th GST Council meeting is part of a push toward “GST 2.0”, which includes simplifying GST slab structure, rationalisation of many rates, making essential and socially beneficial goods & services cheaper / exempt.
  
  
• Many items and services (outside insurance/banking) are being moved to 5%, 0%, or in some cases much higher (e.g. luxury/sin goods) with special higher rate slabs. These reforms help to see insurance sector changes as part of a larger strategy of easing burden on consumers especially for essential services.

Challenges & Open Questions

• Operational classification clarity: Insurance companies must ensure policies are correctly classified as individual/family vs group otherwise there could be disputes or mistakes leading to compliance risk.
  
  
• Impact on smaller insurers / standalone health insurers: These may have fewer taxable lines to offset their input costs; thus loss of ITC will hit them harder.
  
  
• Customer awareness: Policyholders may need to understand how this change affects premiums; some may expect large reductions, others may get smaller adjustments. Transparency from insurers will be important.

Summary of Key Numbers & Dates (From 56th GST Council Meeting)

• Effective date: 22nd September 2025 for the GST exemption on individual life & health insurance premiums.
  
  
• Rate before change: 18% GST applied to life insurance, health insurance (for individual and group), and many banking-service charges.
  
  
• Rate after change (for individual/family life & health insurance): 0% GST under new notification.
  
  
• Group policies are still subject to 18%.
  
  
• Banking services including transaction charges, ATM/branch withdrawals, etc. continue to attract 18% GST. 

Conclusion

The 56th GST Council meeting has delivered a major relief for individuals in insurance: from 22 September 2025, all life and health insurance policies purchased by individuals / families (and their reinsurance) will no longer carry the 18% GST charge. This is an important step toward making insurance more affordable and addressing financial inclusion.

The banking sector remains largely under the old regime for now; service charges etc. continue to have 18% GST.

Overall, these changes are part of a broader push to simplify GST slabs and reduce rates on socially important goods and services. For consumers, this could mean real cost savings; for insurers and banks, it means updating systems, reworking pricing models, and managing compliance carefully.