What is an exempt supply under GST?
Exempt supplies under GST refer to transactions that have zero GST rate.
These supplies fall into three categories:
- Supplies taxed at a ‘NIL’ rate of tax (0% tax), which means no tax is levied on these items.
- Supplies that are fully or partially exempted from CGST or IGST under specific notifications amending Section 11 of the CGST Act or Section 6 of the IGST Act.
- Supplies classified as non-taxable under Section 2(78) of the Act, such as alcoholic liquor for human consumption, which are explicitly excluded from GST.
For these exempt supplies, no GST is charged, and businesses cannot claim ITC on the taxes paid for these transactions. It’s important to note that zero-rated supplies, such as exports, are distinct and not classified as supplies taxable at a ‘NIL’ rate of tax.
To understand how these exemptions affect your tax calculations, businesses can use a GST Calculator to get clarity on applicable GST rates and determine accurate tax liabilities.
Changes in GST Exemption and Taxation Across Services
Item/Service
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Old Exemption Status
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New Exemption Status
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Renting a Residential Dwelling
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Fully exempt from GST in all cases
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Taxable at 18% if rented to a GST-registered person for any purpose, under the Reverse Charge Mechanism (RCM). Exemption continues for rentals to unregistered persons.
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Hospital Room Charges
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Exempt from GST
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Taxable at 5% for non-ICU rooms when charges exceed Rs. 5,000 per day. ICU, ICCU, and NICU rooms remain fully exempt regardless of the rate.
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Hostel & Paying Guest (PG) Accommodation
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Exempt if the declared tariff was below Rs. 1,000 per day
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Taxable at 12% for most commercial hostels and PGs. Exemptions still apply if monthly rent per person is up to Rs. 20,000 for a stay of 90 days or more. Hostels run by educational institutions for their students remain exempt.
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Life & Health Insurance
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Taxable at 18%
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Exempt from GST. The GST Council removed GST on individual life and health insurance premiums to make them more affordable and accessible.
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Packaged & Branded Food Items
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Exempt if sold unpackaged and unbranded
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Taxable at 5% if pre-packaged and labelled (e.g., packaged curd, lassi, atta, paneer). Exemption continues for unbranded and unpackaged items.
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Types of GST exemptions
GST exemptions are classified based on the type of exemption and the nature of the supplier. Here are the main categories:
- Supplier-based exemption
This exemption applies to specific suppliers, regardless of the goods or services they provide. Typically, it’s granted to organizations engaged in public welfare or nonprofit activities.
Example: Services offered by charitable organizations are exempt from GST, regardless of the service type.
- Supply-based exemption
Certain goods and services are exempt from GST due to their essential nature. This exemption applies based on the type of supply, not the supplier.
Example: Healthcare services, educational services, and public utility services (e.g., water supply) are exempt from GST.
- Absolute exemption
This exemption is unconditional, meaning the supply is fully exempt from GST without any terms or conditions attached.
Example: The transmission or distribution of electricity by an electricity utility company is completely exempt from GST.
- Conditional or partial exemption
These exemptions are subject to specific conditions or limits. They may be fully or partially applicable depending on certain criteria, such as threshold limits or specific use cases.
Example: Hospital room charges are exempt from GST if they do not exceed Rs. 5,000 per day (excluding ICUs). Similarly, intra-state meaning in GST supplies from unregistered persons are exempt under reverse charge if the total value is below Rs. 5,000 per day.
List of GST exemptions
Category
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Exempt Products/Services (as of September 22, 2025)
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Fresh and Unprocessed Food
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Fresh vegetables, fruits, unprocessed cereals and grains (unbranded and unpackaged), meat, fish, and eggs.
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Dairy Products
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Fresh milk, buttermilk, and curd (unbranded and unpackaged). Note: Pre-packaged and branded curd, lassi, and buttermilk are now taxable at 5%.
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Healthcare
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Services provided by clinical establishments, authorised medical practitioners, and paramedics. Note: Hospital room charges exceeding Rs. 5,000 per day are taxable at 5% (excluding ICU/ICCU/NICU).
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Education
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Services offered by educational institutions for pre-school, school, higher education, and vocational training.
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Residential Renting
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Renting a residential dwelling for personal use. Note: Renting to a GST-registered person for any purpose is now taxable at 18% under the Reverse Charge Mechanism.
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Transport
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Public transport services (non-AC), passenger transport by metro or bus, and transport of goods by road (except where handled by Goods Transport Agencies).
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Financial Services
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Interest on loans, deposits, and savings accounts.
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Government
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Services provided by government or local authorities, with some exceptions (e.g., services charged above Rs. 5,000, property rentals, and services to private entities).
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Handloom and Handicrafts
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Handloom products and certain handicraft items as specified by the government.
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Books and Newspapers
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Printed books (including e-books), newspapers, and journals (excluding publications with significant advertising content).
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Water and Electricity
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Supply of water and electricity for domestic and industrial use.
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Religious and Personal Services
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Services provided by religious organisations, funeral services, and services by salaried employees to their employer.
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Agricultural Services
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Services related to cultivation, harvesting, farm labour supply, and warehousing of agricultural produce.
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Life-saving Goods
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Blood and blood derivatives, human organs, and vaccines (some vaccines are now taxable).
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GST exemption from registration
- A person whose turnover falls below the threshold exemption limit—INR 40 lakhs for goods, INR 20 lakhs for services, and INR 20 lakhs (or INR 10 lakhs in special category states) for specified categories.
- A person making NIL-rated or exempt supplies of goods and services, such as fresh milk, honey, cheese, agricultural services, etc.
- A person engaged in activities that are not considered as supplies of goods and services, such as funeral services, petroleum products, etc.
- A person supplying goods covered under the reverse charge mechanism, such as tobacco leaves, unprocessed cashew nuts (not shelled or peeled), etc.
GST exemption for businesses
Small and medium enterprises (SMEs) play a crucial role in the economy, and the Goods and Services Tax (GST) framework provides specific exemptions to simplify compliance. These exemptions are based on the annual aggregate turnover of a business, as detailed below:
1. GST exemption for businesses supplying goods
- Businesses engaged in the supply of goods are eligible for GST exemption if their aggregate turnover is below INR 40 lakhs in a financial year.
- For businesses operating in hilly and northeastern states, the exemption threshold is INR 20 lakhs to accommodate regional challenges.
2. GST exemption for businesses providing services
- Businesses providing services can avail of GST exemption if their aggregate turnover does not exceed INR 20 lakhs in a financial year.
- In hilly and northeastern states, the exemption threshold is INR 10 lakhs to support local service providers.
3. Definition of aggregate turnover
The term “aggregate turnover” refers to the total value of all transactions, including taxable supplies, inter-state supplies, exempt supplies, exports of goods and services.
Certain deductions are applied when calculating aggregate turnover, such as:
- GST paid under CGST, SGST, or IGST
- Taxes payable under the reverse charge mechanism
- The value of inward supplies of goods and services
- The value of non-taxable goods and services
These exemptions are designed to ease the compliance burden for SMEs, enabling them to focus on business growth while benefiting from tax relief.
Difference between exempt, NIL rated, zero rated, and non-GST supplies
Supplies can be classified into Exempt, Nil Rated, Zero Rated, and Non-GST categories. While these terms may sound similar, they have distinct purposes and characteristics.
Here is a breakdown:
Category
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What it means
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Can you claim ITC?
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Example
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Exempt supplies
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Goods or services on which GST is not charged because of a government exemption.
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No
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Fresh milk, education, healthcare services
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Nil-rated supplies
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Goods or services with 0% GST as per the GST rate schedule. Similar to exempt supplies; terms are often used interchangeably.
|
No
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Unprocessed food grains, salt
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Zero-rated supplies
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Goods or services that are exported or sent to a Special Economic Zone (SEZ). GST rate is 0%.
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Yes
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Export of goods or services
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Non-GST supplies
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Goods or services not covered under the GST law. They may have other taxes like VAT.
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No
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Alcoholic drinks for human consumption, petrol, diesel
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Navigating GST exemptions for business growth
For entrepreneurs registered under GST, understanding the nuances of GST exemption is not just about compliance; it is about leveraging these exemptions to minimise tax liabilities and enhance the financial standing of the business. Whether the GST exemption applies to goods or to services, each area offers opportunities for tax savings and improved cash flow management. This knowledge is particularly beneficial when applying for business loans, as it presents a clearer picture of the business's financial health to lenders.
How are these GST exemptions granted?
Under the Goods and Services Tax (GST) system, certain goods and services are made tax-free (exempt) by the Central and State Governments to support public welfare and boost the economy. Here's how the exemption process works:
- Official Notifications: The government issues official notices to clearly list the goods or services that are exempt from GST. This helps ensure transparency.
- GST Council Recommendations: Before giving any exemption, the GST Council—made up of members from both Central and State Governments—must first approve it.
- Special Orders: In rare cases, exemptions can be given through a special order to handle unique or urgent situations.
Reasons for goods exempted from GST
Under the Goods and Services Tax (GST) system in India, some goods, services, and transactions are exempt from GST, meaning they are not subject to GST taxation. Exemptions are granted for various reasons, reflecting policy goals, socio-economic factors, and administrative convenience. Businesses can gain additional clarity by understanding the GST structure India, which outlines the tax framework and its applicability across different sectors. Here are some common reasons for these exemptions:
- Social welfare and public interest: Essential goods and services vital for societal welfare, such as basic food items (e.g., rice, wheat, milk), healthcare services, and education, may be exempt from GST.
- Small businesses: To ease the compliance burden on smaller enterprises and encourage business growth, exemptions or reduced rates may apply to businesses with lower turnover. The Composition Scheme, for instance, offers lower GST rates for small businesses within certain turnover limits.
- Export of goods and services: Exports are generally zero-rated under GST, meaning they are taxed at a zero percent rate. This helps keep exports competitive internationally and prevents the GST burden from affecting export prices.
- Interstate supplies: Certain interstate supplies of specified goods and services may be exempt or taxed at a reduced rate to facilitate the smooth movement of goods and services across state lines.
- Agriculture: Many agricultural products and services are exempt from GST to support the agriculture sector, which plays a crucial role in India’s economy.
- Government services: Some services provided by the government or local authorities are exempt from GST to avoid double taxation and simplify accounting processes.
- Financial services: Certain financial services, including banking, loan interest, and insurance, may be exempt or subject to special provisions for GST liability.
- Cultural and religious significance: Goods and services used for cultural, religious, or charitable purposes may be exempt to honour cultural and social values.
- Administrative simplicity: Exempting certain goods or services helps simplify the tax system, reducing compliance costs and making it easier for businesses and taxpayers to navigate GST regulations.
- Transitional provisions: During the transition to GST, some exemptions or concessional rates may be applied to ease the shift for businesses and mitigate the impact of the new tax regime.
Important Notifications Regarding GST Exemptions
Several important government notifications list the GST exemptions for goods and services under the CGST Act. Here are the main ones:
- Notification 02/2017 – Central Tax (Rate), dated 28.06.2017 – For Goods
This notification exempts about 149 items from GST. Some of the key items include electricity, salt, fresh fruits, and passenger baggage. It has been updated by Notifications 28/2017, 35/2017, 42/2017, 7/2018, and 19/2018.
- Notification 12/2017 – Central Tax (Rate), dated 28.06.2017 – For Services
This notification gives GST exemption for certain services, mostly similar to those that were exempt under the old service tax rules. It has been updated by Notifications 21/2017, 25/2017, 32/2017, 47/2017, and 2/2018.
Recent Changes in GST Exemption Policies
The GST Council has been actively working to simplify the GST system and provide relief to taxpayers.
1. 56th GST Council Meeting (2025)
Held in September 2025, this meeting brought the biggest changes since GST began, introducing a simpler three-tier tax system:
- New Tax Slabs: The earlier four-tier system (5%, 12%, 18%, 28%) was replaced with three rates:
- 5% – Essentials
- 18% – Standard
- 40% – Luxury / Sin items
The 12% and 28% slabs were mostly removed.
- Major Exemptions:
- Health & Life Insurance: All individual health and life insurance policies are now fully GST-free.
- Staple Foods & Dairy: Many pre-packaged and labelled staple foods, like UHT milk, paneer, roti, and paratha, are now tax-exempt.
- Medicines: Over 30 life-saving medicines have moved from 12% GST to nil.
- Educational Materials: Items like notebooks, pencils, erasers, and maps are now fully exempt, reducing costs for students.
2. 53rd GST Council Meeting (2024)
Key decisions included:
- SEZ Benefits: Compensation Cess on SEZ imports was removed.
- Railway Passenger Relief: GST was removed for services like platform tickets, retiring rooms, and battery-operated car services.
- Accommodation Services: Long-term stays for students and working professionals (90 days or more, rent up to ₹20,000 per month) are now GST-free.
3. 47th GST Council Meeting (2022)
This meeting focused on simplifying the exemption list and considering public feedback on GSTR-3B. However, its measures have now been superseded by the more recent major reforms.
Conclusion
Navigating the complexities of GST exemptions can significantly impact a business's financial planning and tax liabilities. For businesses seeking financial growth or support through business loans, a deep understanding of GST exempted items and services is invaluable. It not only aids in ensuring compliance with tax regulations but also enhances financial management, making the business more appealing to lenders and financial institutions.
