57th GST Council: Health & Life Insurance ITC under GST - Section 17(5)(b)(i) Changes, Eligibility & Practical Impact

Introduction

The 57th GST Council Meeting held on 8 October 2026 has proposed an important relaxation in the blocked-credit provisions under Section 17(5)(b)(i) of the CGST Act by recommending removal of the specific restrictions relating to health insurance and life insurance. The proposal is particularly relevant for businesses purchasing group medical insurance, group term life insurance and other employer-sponsored insurance policies for employees, since such credits are generally restricted under the existing law unless a specific statutory exception applies. However, the proposed relaxation should not be treated as an automatic entitlement in every insurance arrangement, because policy classification, GST applicability, business nexus, employee/dependant coverage, premium recoveries, Section 16 conditions, other restrictions under Section 17 and the mandatory ISD framework for multi-GSTIN organisations may still affect the final credit position. The existing law and the proposed amendment therefore need to be examined carefully before determining the actual ITC benefit available in each case.

In this article, I have discussed the practical applicability, ITC implications, calculation methodology, reporting and distribution requirements, and key precautions relating to health insurance and life insurance under Section 17(5)(b)(i) of the CGST Act. In case you have any doubt after reading this article, or if you feel that any practical aspect requires further discussion, you may contact me at the contact details mentioned at the end of this article.

The proposed amendment is particularly significant for companies purchasing group medical insurance and group term life insurance for employees.

Under the existing law, ITC on health insurance and life insurance is generally blocked, except in certain specified circumstances. The proposed relaxation may allow businesses to claim qualifying ITC even where the employer voluntarily provides insurance as an employee benefit.

Important: The recommendation has not yet become an operative amendment. Until the relevant amendment takes effect, the existing restrictions continue to apply.

1. Difference Between Individual Insurance and Group Insurance

The distinction between individual insurance and group insurance is particularly important because the GST treatment of insurance changed with effect from 22 September 2025.

Individual life and health insurance policies became exempt from GST, whereas employer-sponsored group insurance policies continue to attract 18% GST.

Important: The proposed amendment primarily benefits businesses paying GST on group insurance policies. It does not create an ITC entitlement where the policy itself is exempt and no GST is charged.

2. Existing Legal Position under Section 17(5)(b)(i)

Section 17(5)(b)(i) expressly restricts ITC on life insurance and health insurance.

Therefore, merely establishing that an insurance premium has been paid for business purposes does not automatically make the credit eligible.

However, there are three statutory exceptions.

CBIC Circular No. 172/04/2022-GST, dated 6 July 2022, clarifies that the statutory-obligation exception applies to the entire Section 17(5)(b), including health insurance and life insurance.

Meaning of Insurance Obligatory under Law

An important distinction exists between insurance provided voluntarily by an employer and insurance required under an applicable law.

A contractual obligation or internal company policy should not automatically be equated with an obligation imposed by law.

The precise statutory requirement must be identified, and the purchased policy must satisfy that requirement.

The proposed amendment is therefore especially significant for voluntary group insurance, which is generally blocked under the existing provisions.

3. Health Insurance - Detailed Applicability

Health insurance includes policies covering hospitalisation, medical expenses, critical illnesses and other insured medical risks.

The proposed relaxation may benefit employer-sponsored insurance arrangements, subject to the final legislative provisions.

Health Insurance - Situation-Wise ITC Analysis

Important Considerations for Health Insurance

• Employee coverage: Group medical insurance purchased for employees in connection with their employment is one of the principal categories expected to benefit from the proposed amendment.
• Coverage of dependants: Where a group policy covers spouses, children or parents, the final statutory language must be examined to determine whether the entire premium becomes eligible or any portion remains restricted because of personal-consumption considerations.
• Directors' insurance: Insurance purchased for working directors employed by the company may have a stronger business nexus than separate personal medical insurance purchased for non-executive directors or shareholders.
• Contract workers: Eligibility must be examined with reference to the recipient of the insurance service, the contractual arrangement, business purpose and final enacted provisions.
• Premium recovered from employees: Where employees contribute towards the premium, it will be necessary to examine the nature of the recovery, the recipient of the insurance service and whether any portion of the expenditure is required to be separately treated.

The proposed amendment does not yet prescribe a universal rule restricting ITC to the employer-funded portion of the premium.

4. Life Insurance - Detailed Applicability

Life insurance provides financial protection against death and may include group term insurance, business-protection policies and other contractual arrangements.

The proposed relaxation is particularly relevant to group life insurance purchased by employers for employees.

Life Insurance - Situation-Wise ITC Analysis

Important Considerations for Life Insurance

• Group term insurance: Voluntary group term-life insurance provided as an employment benefit is one of the principal categories likely to benefit from the proposed relaxation.
• Keyman / business-protection insurance: Where an insurance policy protects the business against financial loss associated with the death of a key executive, the business purpose may be established. However, the first question is whether GST is actually chargeable on the particular policy. If the policy falls within an exempt individual-life-insurance category, there is no GST available as input tax credit. If the policy remains a taxable group or other taxable insurance service, the proposed ITC relaxation may become relevant.
• Insurance for working directors: Policies covering executive directors as part of an employment arrangement may be distinguishable from policies purchased primarily for promoters' personal benefit.
• Group credit-life insurance: The identity of the recipient and actual insurance arrangement are particularly important. Merely facilitating a policy for customers or borrowers does not establish an ITC entitlement.
• Contract workers and retired employees: The business relationship, actual contractual obligations, recipient of service and policy classification remain relevant.

5. Insurance Provided as an Employment Perquisite – GST Implications

Two separate questions arise when an employer provides insurance to employees:

• Whether the employer is eligible to claim ITC on the GST charged by the insurance company.
• Whether GST is payable when the employer provides the insurance benefit to employees.

These are independent questions.

CBIC Circular No. 172/04/2022-GST clarifies that contractual perquisites provided by an employer to employees in accordance with their employment arrangements are generally not separately subject to GST merely because they are provided as part of employment.

However, the absence of outward GST on an employment perquisite does not automatically make ITC on the corresponding insurance premium eligible.

Under the existing Section 17(5)(b)(i), health and life insurance are generally blocked unless a statutory exception applies.

After the proposed amendment, insurance ITC may become available even where there is no separate taxable outward supply from the employer to the employee, provided the remaining statutory conditions are satisfied.

Where the employer separately recovers insurance premiums from employees, the nature of the arrangement must be examined independently.

The recovery may raise questions concerning whether the employer is making a separate supply or merely recovering part of an employment-related benefit.

The proposed relaxation does not automatically determine the GST treatment of these recoveries.

6. Insurance Purchased for Employees Working in Different States

Companies operating through multiple GST registrations frequently purchase group insurance centrally for employees working across different States.

Where an insurance policy covers employees of multiple establishments, the ITC implications must be considered registration-wise.

The principal issues include:

• Which GST registration is the actual recipient of the insurance service.
• To which GSTIN the insurance company has issued its invoice.
• Whether the policy covers employees of one registration or several registrations.
• Whether the insurance service is attributable to multiple distinct persons under GST.
• Whether the mandatory Input Service Distributor provisions apply.
• How eligible ITC must be allocated or distributed between registrations.

Mandatory ISD Framework

Under the Input Service Distributor framework effective from 1 April 2025, where an office receives third-party input-service invoices for or on behalf of more than one distinct GST registration under the same PAN, the mandatory ISD provisions must be examined and the eligible credit distributed in accordance with Section 20 and Rule 39.

Credit attributable exclusively to a particular recipient is to be distributed to that recipient, while common credit is required to be distributed in the prescribed manner.

Therefore, even if the proposed amendment removes the insurance-specific credit restriction, it does not mean that the entire ITC can automatically be claimed by the head-office registration merely because the head office pays the premium.

The invoice, contractual arrangement, identity of the recipient and applicable credit-distribution provisions must be followed.

7. Insurance ITC for Businesses Making Taxable and Exempt Supplies

The proposed amendment relates specifically to the blocked-credit restriction under Section 17(5)(b)(i).

It does not remove the restrictions contained in Section 17(1), Section 17(2) or the special provisions of Section 17(4).

Businesses Making Both Taxable and Exempt Supplies

Where insurance services are used partly for taxable and partly for exempt business activities, the eligible ITC must be determined in accordance with the relevant GST apportionment provisions.

A company cannot automatically claim the entire insurance ITC merely because the specific restriction on health or life insurance has been removed.

Banks, Financial Institutions and NBFCs

Banks, financial institutions and NBFCs engaged in accepting deposits or extending loans or advances may be subject to the special provisions of Section 17(4).

Where an eligible entity has opted for the prescribed 50% ITC mechanism, that restriction continues to be relevant even where the underlying insurance service becomes otherwise eligible.

The removal of the specific insurance-related restriction under Section 17(5)(b)(i) does not automatically override Section 17(4).

Similarly, businesses making exempt supplies must continue to examine the restrictions relating to exempt-supply attribution.

Conclusion

The proposed relaxation of Section 17(5)(b)(i) is an important development for businesses purchasing group health insurance and group life insurance.

Under the existing law, ITC on these services is generally blocked except where a specific statutory exception applies, particularly where the employer is legally obligated to provide the relevant insurance.

The proposed amendment may extend eligibility to voluntary group insurance purchased for genuine business purposes.

This could benefit manufacturing companies, trading businesses, service-sector organisations and other employers providing insurance benefits to their employees.

However, the treatment of insurance covering employees' dependants, directors, contract workers, retired employees, premium recoveries and business-protection arrangements will depend on the final statutory provisions.

Businesses must also continue complying with Section 16, the remaining restrictions under Section 17 and the applicable GST registration and credit-distribution requirements.

Particular care is required in relation to Keyman and business-protection policies, because the first issue is whether GST is actually chargeable on the relevant policy. Likewise, businesses operating through multiple GST registrations must separately comply with the mandatory ISD framework wherever applicable.

As of 20 October 2026, the proposed relaxation has not been brought into force. The final amendment will determine the exact extent, conditions and commencement of the benefit.

The author can also be reached at varunmukeshgupta96@gmail.com