Taxing Collective Security

While GST relief for individual insurance is welcome, but taxing group insurance at 18 percent weakens India’s largest vehicle for mass social protection.

In a landmark reform, the Indian government abolished the Goods and Services Tax (GST) on individual life and health insurance, advancing its ambition of “Insurance for All by 2047.” By removing the 18 percent tax burden on retail policies, the state lowered the cost of financial protection for millions of households confronting rising medical expenses and economic uncertainty.

Yet beneath the celebration lies a glaring contradiction. While individual policyholders now enjoy a tax-free regime, group insurance — the backbone of mass insurance coverage in India — continues to attract 18 percent GST. This silent tax on collective security risks undermining the very inclusivity the reform was meant to achieve.

Effective Mechanism

Group insurance is far from a niche corporate benefit. It is India’s most effective mechanism for extending financial protection to millions of workers and families. In FY 2024-25, the life insurance industry collected around Rs. 8.86 lakh crore in premiums. Though individual policies dominate public attention, group schemes account for a far larger share of lives covered, protecting employees, members of cooperatives, borrowers of microfinance institutions and workers in countless organised and semi-organised sectors.

The imbalance is even sharper in health insurance. Of nearly 58 crore insured lives in India, almost 47.4 percent are covered through group or employer-sponsored policies, while individual retail policies account for only 10.3 percent. In practical terms, for every person buying an individual policy, several others receive protection through group arrangements. Yet these collective policies remain taxed at a rate usually reserved for standard commercial services.

The justification for this disparity rests on the assumption that group insurance is a business-to-business transaction where employers can claim Input Tax Credit (ITC). But this argument ignores India’s economic reality. Group insurance is not merely a corporate privilege for large firms; it is often the only affordable pathway to insurance for gig workers, labourers, lower-middle-class employees and informal-sector workers.

For small and medium enterprises operating on narrow margins, the 18 percent GST becomes a direct cost rather than an adjustable tax credit. Many lack sufficient GST liabilities to fully offset ITC benefits. As a result, employers either reduce coverage for workers or abandon insurance altogether. For a small factory owner, a cooperative society or a microfinance institution, the tax can mean the difference between providing protection and leaving workers exposed.

Moral Inconsistency

The present system also creates a moral inconsistency. If individual life and health insurance deserve zero taxation because they serve a vital social purpose, why should the same protection become taxable simply because it is purchased collectively? Illness, death and financial distress do not discriminate between individually purchased and employer-provided policies.

By taxing group insurance at 18 percent, the government is effectively penalising the most efficient delivery mechanism for social security. Group policies are naturally more affordable because they spread risk across large numbers of people and reduce administrative costs. The heavy GST burden erodes this advantage, making mass insurance less accessible precisely where it is needed most.

India still suffers from high out-of-pocket healthcare expenditure, with a single hospitalisation often pushing families into debt or poverty. Lower group insurance premiums would allow employers to extend coverage to spouses, children and elderly parents who are frequently excluded because of cost concerns.

In life insurance, tax-free group term plans could significantly improve protection for workers in hazardous and low-income occupations. Cooperatives, unions and small enterprises would be better positioned to provide meaningful death benefits to vulnerable families.

Critics may warn about the loss of GST revenue, but such concerns are short-sighted. A well-insured population reduces long-term pressure on public hospitals and state welfare systems. Insurance companies also play a vital role as long-term investors in infrastructure and government securities. Greater insurance penetration strengthens economic resilience while encouraging the private sector to share responsibility for social welfare.

The government’s decision to exempt individual insurance from GST was an important first step. But the mission remains incomplete so long as group insurance continues to face an 18 percent tax wall. In a country where collective mechanisms often provide the only meaningful safety net, equalising the GST treatment of individual and group insurance would be a transformative act of equitable governance.

India’s push toward universal financial protection cannot afford such contradictions. The state must recognise that the ‘group’ is often the only shield available to the individual. Extending tax-free status to group insurance would ensure that the promise of protection truly reaches every citizen — not just those who can afford to stand alone.

(The writer is a former college Principal and Founder of Supporting Shoulders, an Odisha-based non-profit Trust. Views personal.)