Insurance companies will have to reverse accumulated ITC after GST exemption kicks in

New Delhi: Life and health insurance firms will have to reverse the Input Tax Credit (ITC) accumulated till September 21, 2025 after the GST exemption kicks in, raising cost burden on companies, according to tax experts.

However, individual life and health insurance policyholders will benefit as the Goods and Services Tax (GST) exemption on premium payments kick in from September 22. Currently, 18 per cent GST is levied on premium payment for such policies.

The finance ministry in a set of FAQs issued after the 56th GST Council meeting said businesses whose outward supply has been exempted after the GST rate rationalisation will have to reverse their ITC which is accumulated in their ledger.

The accumulated ITC can be utilised only to discharge outward liability for supplies of goods/services, or both, made till September 21, 2025, the ministry said.

"However, for supplies made on or after i.e 22nd September, 2025 when the rate change is effected, ITC will have to be reversed as per provisions of CGST Act, 2017," it said in the FAQ.

The GST Council, comprising finance ministers from Centre and states, on Wednesday approved to make GST a two-tier structure of 5 and 18 per cent, with a special rate of 40 per cent on tobacco and related products and ultra-luxury items. The new rates will be effective September 22.

Currently, GST is levied in the slabs of 5, 12, 18 and 28 per cent.

As part of the rationalisation, GST has been exempted on individual life insurance, including term, ULIP, and endowment plans and reinsurance services. Currently, premium payment on such policies attract a 18 per cent tax.

AMRG & Associates Senior Partner Rajat Mohan said in practice, insurance companies deal with a large volume of common input services -- such as IT platforms, professional services, and branch operations -- which makes segregation of credit complex.

A sudden requirement to reverse the entirepool of unutilised credit without any refund mechanism will be a financial setback for the sector, he said.

"To strike a balance between consumer interest and industry sustainability, the government may consider a phased reversal or a limited refund window for credit legitimately earned before the exemption date," he said.

Nangia Andersen LLP Partner-Indirect Tax, Rahul Shekhar, said the most important clarification required by the industry is part of the FAQ regarding treatment of exempt supplies post-GST rate change.

"Companies must be ready to reverse ITC and ring-fence credits to stay compliant," Shekhar said.

Mohan further said, "While policyholders will directly benefit from zero tax on premiums, insurers will be required to reverse the ITC accumulated till 21st September, 2025. This reversal obligation effectively converts legitimate credits, accrued when insurance was a taxable supply, into a cost burden for insurers."

Deloitte India Partner & Indirect Tax Leader Mahesh Jaising said as per the FAQ, ITC accumulated at higher rates can continue to be utilised, but ITC relating to supplies that become exempt must be reversed proportionately from September 22.