Understanding the Impact of GST on Health Insurance in India

Posted on: Jul 2, 2024 | 3 mins | Written by: HDFC ERGO Team

Understanding the Impact of GST on Health Insurance in India

Goods and Services Tax, or GST, is a comprehensive tax levied on goods and services. This unified tax system was implemented on 1st July 2017, replacing many indirect taxes the State and Central Governments levied earlier. This new tax was introduced to replace the existing fragmented and complex tax structure with an easy one to reduce tax cascading and simplify compliance. GST applies to many goods and services, and health insurance is one of them. Read on to understand the impact of GST on health insurance.

Impact of GST on health insurance

The impact of GST on health insurance has been both positive and negative. Before GST, a total service tax of 15% was applicable on health insurance. This included 14% of the Basic Service Tax, 0.5% of Swachh Bharat Cess, and 0.5% of Krishi Kalyan Cess. GST has replaced multiple taxes with one and simplified the tax structure. It has also improved documentation and reduced fraudulent claims.

However, although GST has replaced multiple indirect taxes and simplified the tax structure, it has increased the cost of health insurance by 3%. Considering that health insurance premiums have increased in the past few years, especially after the COVID-19 pandemic, a high GST rate can prevent people from covering themselves and their loved ones under health insurance.

How does GST affect your health insurance premium?

GST has increased taxes on health insurance premiums by 3%. As per the previous tax laws, policyholders were liable to pay a 15% tax on policy premiums. After the introduction of GST, policyholders must pay 18% GST or taxes on the same.

How is GST calculated in health insurance?

GST Is calculated on health insurance premiums. Here’s an example explaining the same:

Suppose you have health insurance for INR 20 lakh, and the annual premium is INR 30,000 plus taxes. Let’s calculate the premium amount before GST and after.

• Before GST:

Calculation of health insurance premium before GST (when the applicable tax was 15%)

◦ Premium amount = INR 30000

◦ Taxes = 15%

◦ Therefore, total taxes on policy premium will be = 30000 x 15% = 4,500

◦ Total premium with taxes = INR 30000 + INR 4500 = INR 34500

• After GST:

Calculation of health insurance premium after GST (the applicable tax is 18%)

◦ Premium amount: INR 30,000

◦ Taxes (GST): 18%

◦ Therefore, the GST amount on health insurance premium will be = 30000 x 18% = 5,400

◦ Total premium with GST = INR 30000 + INR 5400 = INR 35,400

In this case, GST increased taxes on health insurance by INR 900 annually.

• GST on no-claim bonus:

The no-claim bonus you earn on your health plan is free of GST. Therefore, if you have earned a no-claim bonus on your health insurance policy, GST will be calculated on the premium value you get after deducting the no-claim bonus from it.

Let’s understand this with an example.

Suppose you earned a no-claim bonus discount of 10% on your health insurance premium. In this case, your policy premium will be calculated as follows:

◦ Premium amount = INR 30,000

◦ No-claim bonus = 30000 x 10% = 3000

◦ Health insurance premium after no-claim bonus = INR 30000 – INR 3000 = INR 27,000

Now, GST will be added to the discounted premium amount of INR 27,000. Here’s how:

◦ GST = 27000 x 18% = INR 4,860

◦ Total premium with GST = INR 27000 + INR 4860 = INR 31860

Positive and negative impacts of GST

GST has had positive as well as negative impacts on health insurance.

Positive impacts

1. Simplified taxation:

GST has simplified the taxation system for insurers and policyholders. It has replaced multiple taxes with one, making the entire process more transparent and effective.

2. Better compliance:

The new taxation system has improved compliance and transparency within insurance companies. It ensures that insurance providers adhere to the tax regulations and pay the required GST on health insurance premiums and services.

3. Lesser fraudulent claims:

GST has also improved the documentation of insurance policies. This has helped reduce fraudulent claims by policyholders.

4. Input tax credit for insurers:

Insurance companies can claim an input tax credit (ITC) on the GST paid for the various services they render. This reduces their tax liabilities and helps them offer better premiums to policyholders.

Negative effects

1. Higher premiums:

GST has increased health insurance premiums by 3%. Therefore, this new taxation system has made health insurance expensive.

2. No input tax credit for businesses:

Corporates or businesses cannot claim input tax credit of GST paid on group health plans they offer to their employees.

3. Higher room rent:

If the per day rent of a hospital room exceeds INR 5,000, an additional GST of 5% will be applicable on the same. However, if the daily room rent is below INR 5,000, it will not attract an additional GST.

Here’s an example:

Suppose the daily rent for your hospital room is INR 7,000, and you are admitted for 4 days. In this case, the GST on your hospital room will be calculated in the following way:

Room rent for 4 days = 7000 x 4 = 28000

GST of 5% on the total rent = 28000 x 5% = 1400

Therefore, the total bill for your hospital room will be = INR 28000 + INR 1400 = INR 29,400

GST on health insurance policy renewal

A GST of 18% applies to health insurance renewal premiums. This simply means that you will have to pay a GST of 18% every time you renew your health insurance policy. If you have earned a no-claim bonus in the form of reduced policy premiums, GST will be calculated on the revised premium amount.

However, if you bought a long-term health insurance policy before GST was introduced, this new taxation system will not impact your policy premiums.

FAQs

1. Can I get a GST refund on health insurance?

Yes, you can claim a GST refund on health insurance premiums under Section 80D of the Income Tax Act, 1961. If you are below 60, you can claim a refund of up to INR 25,000 on the total premium paid during a policy year. Senior citizens can claim a refund of up to INR 50,000 on their health insurance premiums, which includes the base premium amount plus 18% GST.

2. How can I save GST on my health insurance?

You can save on GST by choosing health insurance premiums wisely. If you are below 60 and choose policy premiums below INR 25,000 (including GST), you can claim a refund of the entire amount. It is also advisable to consult with a tax advisor or financial planner to learn about legitimate ways to save GST on health insurance.

3. How much GST refund can I claim?

The refund you can claim will depend on your age and health insurance premium. If you are below 60 and your health insurance premiums, including GST, are within INR 25,000, you can claim the entire amount. However, if your health insurance premium with GST is above INR 25,000, you will only get a maximum refund of INR 25,000. If you are a senior citizen, you can claim a refund of up to INR 50,000.

4. What is blocked credit in GST?

Blocked credit is the input tax credit businesses cannot claim under the GST regime. Businesses must pay input tax on the goods and services they use throughout the year. However, some goods and services are not considered inputs in production, so businesses cannot claim an input tax credit on those. These goods and services are considered blocked credit.

Conclusion

To sum up, the main impact of GST on health insurance is increased policy premiums. However, health insurance is a significant investment that can cover a considerable part of your healthcare bills during medical emergencies and ensure financial protection. Therefore, although health insurance premiums have increased by a certain amount, having this insurance product handy would benefit you in the long run. If there is a medical emergency, you can opt for the finest treatment without burning a hole in your pocket.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.

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