ITC eligibility on employee term insurance and mandatory gratuity

Annual renewals for employee benefit covers often produce large tax invoices from life insurance companies. Accounts teams regularly face a dilemma during the monthly reconciliation: whether to claim the 18% GST charged on group term life insurance and group gratuity schemes or push the amount into blocked reversals. Taking credit on routine corporate perks triggers scrutiny during department audits, while reversing legitimate statutory compliance costs results in irrecoverable cash outflow.

The statutory baseline under Section 17(5)(b)

Under Section 17(5)(b)(i) of the CGST Act, 2017, input tax credit is blocked on life insurance and health insurance services. The statute denies credit on personal risks and welfare benefits extended to personnel in commercial establishments. Similar restrictions apply to corporate health insurance and related employee amenities.

However, the parent section contains a vital exception through its overriding proviso:

“Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.” Proviso to Section 17(5)(b), CGST Act, 2017

For several years, field formations argued that this proviso applied exclusively to sub-clause (iii) regarding travel benefits. The Central Board of Indirect Taxes and Customs resolved the controversy through CBIC Circular No. 172/04/2022-GST (Issue 3). The Board clarified that the proviso governs the entirety of clause (b). Whenever any central statute, state enactment, or binding statutory rule forces an employer to procure insurance for its personnel, the restriction under Section 17(5)(b)(i) ceases to apply.

Group term life insurance: statutory duty versus voluntary perks

Corporate entities frequently take group term life insurance policies for their workforce to attract talent, offer financial security, or honor internal employment contracts. While HR departments describe these policies as mandatory company policies, internal agreements do not constitute an obligation under law for the time being in force.

Credit on group term life insurance is admissible only in narrow circumstances where an enacted statute explicitly compels insurance coverage:

• Employees Deposit-Linked Insurance (EDLI) Scheme, 1976: Under the Employees Provident Funds and Miscellaneous Provisions Act, 1952, employers must contribute to EDLI or obtain exemption under Section 17(2A) by providing an equal or superior group term insurance policy through a registered life insurer. Premium paid towards an approved group life insurance scheme in lieu of EDLI fulfills a direct statutory duty.
• Mines, ports, and hazardous operations: Specialized industrial statutes mandating personal accident or life covers for workers handling toxic, explosive, or offshore equipment.

Where group term insurance covers managerial staff, software developers, corporate executives, or sales representatives without an underlying statutory mandate, the premium remains permanently blocked under Section 17(5)(b)(i). Other operational welfare items such as tea and snacks for staff are similarly non-creditable.

Group gratuity schemes under Section 4A of the Payment of Gratuity Act

Gratuity is a statutory retirement liability payable under the Payment of Gratuity Act, 1972, to employees who complete five continuous years of service. Under Section 4A(1) of the Act, every employer (other than central or state government establishments) must obtain insurance for its gratuity liability from the Life Insurance Corporation of India or any other prescribed insurer, unless the employer has an approved gratuity fund in place.

The enforcement of Section 4A depends on state-level implementation. The appropriate government must notify the effective date and issue operational rules:

• States with notified compulsory insurance rules: States such as Karnataka have enforced compulsory gratuity insurance by notifying the Karnataka Compulsory Gratuity Insurance Rules, 2024 under Section 4A(4). In notified jurisdictions, obtaining gratuity insurance from a life insurer is a mandatory legal duty. Employers registered with the controlling authority in these States can claim input tax credit on the GST charged on gratuity insurance premiums under the proviso to Section 17(5)(b).
• States without notified rules: Where the state government has not notified the commencement of Section 4A, obtaining an insurance policy from LIC or private insurers is a voluntary risk-hedging mechanism. The employer remains legally liable to pay gratuity directly from its balance sheet, but buying insurance to fund that liability is optional. Tax authorities in non-notified jurisdictions view the premium as non-obligatory, disallowing ITC unless backed by specific judicial relief. Similar statutory thresholds govern canteen facilities for factory workers.

Worked example: Bangalore technology company

Consider Alpha Systems Private Limited, an enterprise operating in Bengaluru, Karnataka with 180 employees. In October 2026, the company renews two separate policies with a registered life insurer:

1. A group term life insurance policy covering all corporate staff with death benefits of ₹50,00,000 per employee, provided voluntarily under employment contracts. Annual premium: ₹5,00,000 plus 18% GST (₹90,000).
2. A group gratuity scheme with LIC to fund statutory gratuity liabilities as required by the Karnataka Compulsory Gratuity Insurance Rules, 2024. Annual premium: ₹8,00,000 plus 18% GST (₹1,44,000).

The total tax of ₹2,34,000 appears in Form GSTR-2B. Under CBIC Circular No. 170/02/2022-GST, the full ₹2,34,000 enters Table 4(A)(5) of Form GSTR-3B. Alpha Systems must report a permanent reversal of ₹90,000 in Table 4(B)(1), leaving a net credit of ₹1,44,000 in Table 4(C).

Step-by-step reporting in Form GSTR-3B

Follow these steps on the GST portal to account for employee insurance credits correctly:

1. Verify insurer reporting: Ensure the life insurance company has filed Form GSTR-1 and the tax invoice appears in your monthly GSTR-2B with matching GSTIN and invoice numbers.
2. Segregate premiums in books: Create separate ledger codes for statutory employee insurance (such as mandatory gratuity and EDLI substitute policies) and voluntary corporate benefit covers.
3. Populate gross ITC in Table 4(A)(5): The portal auto-drafts the cumulative tax amount into Table 4(A)(5) of Form GSTR-3B as instructed by GSTN GSTR-3B instructions.
4. Enter permanent reversal in Table 4(B)(1): In Table 4(B)(1) (As per rules 42 & 43 & section 17(5)), manually enter the GST paid on non-statutory group term life policies. Never report permanent Section 17(5) exclusions in Table 4(B)(2), which is reserved for temporary timing differences.
5. Retain documentary evidence: Maintain policy endorsements, coverage registers, and copies of relevant state statutory orders in the audit file.

Documentation required for audit defense

During department audits or scrutiny under Form GST DRC-01A, tax officers routinely search for insurance SAC codes (such as SAC 997132 for life insurance and SAC 997139 for other non-life insurance) to propose disallowance. To defend an eligible credit claim on gratuity or statutory term insurance, keep the following documentation dossier:

• Tax invoice: Original tax invoice issued by LIC or the registered insurer showing your company GSTIN, SAC, taxable value, and separate CGST, SGST, or IGST heads.
• Statutory order copy: Copy of the state gazette notification notifying Section 4A rules or the regional provident fund commissioner approval order under Section 17(2A) for EDLI exemption.
• Registration certificate: Form I registration acknowledgment with the controlling authority under the Payment of Gratuity Act showing compliance with compulsory insurance.
• Employee roll list: Premium schedule detailing that covered individuals are on the direct payroll of the establishment. Policies extending benefits to non-employee dependents or non-qualifying directors must be backed by proportionate tax apportionment.

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Frequently asked questions

Last checked: 19 October 2026. Sources: CBIC CGST Act Section 17(5), CBIC Circular No. 172/04/2022-GST, CBIC Circular No. 170/02/2022-GST, Payment of Gratuity Act, 1972 Section 4A, and GSTN GSTR-3B Return Filing Instructions.