Zero GST on life and health insurance: What it means for your premiums
The government is considering exempting life and health insurance premiums from the 18% GST, a move aimed at making insurance more affordable for policyholders. While consumers could benefit from lower costs, insurers may face margin pressures due to the loss of input tax credit.
- Aug 23, 2025,
- Updated Aug 23, 2025 1:50 PM IST
New GST framework: A proposal to exempt life and health insurance premiums from the 18% Goods and Services Tax (GST) has sparked debate across the financial services sector. While the move could reduce the cost of insurance for policyholders, experts caution that the decision may complicate matters for insurers, potentially squeezing their margins and leading to price adjustments. A group of ministers has already recommended a complete waiver, and the matter is expected to reach the GST Council in mid-September.
At first glance, scrapping GST on insurance looks like a win for customers. Lower premiums should improve affordability and help expand coverage, particularly in health and term insurance, where penetration in India remains low. However, industry executives argue that the elimination of GST would also remove insurers’ ability to claim input tax credit (ITC) on their expenses. Currently, ITC helps offset costs on commissions, rent, utilities, reinsurance, and distribution, thereby easing financial pressure on insurers. Without this mechanism, the overall cost burden could rise.
For instance, commissions on protection products often start at 35–40% before tapering down to an average of 5–6% over time. Alongside this, insurers spend roughly 10% on administrative costs. At present, they can set off a part of these expenses through ITC, effectively lowering their tax outgo. If GST is scrapped, that credit disappears, and insurers will have to absorb these unrecoverable costs. According to channel checks cited by Macquarie Capital’s Suresh Ganapathy, prices could even rise by 6–10%—undermining the government’s stated goal of reducing premiums for consumers.
The highly competitive nature of the term-insurance market complicates the issue further. If insurers raise premiums, they risk losing customers to rivals. If they hold prices steady, their margins could shrink, leaving little room for profitability. Many executives believe the most likely outcome will be a compromise: consumers may see savings, but not the full 18% that the exemption suggests.
Rakesh Jain, CEO of Reliance General Insurance, highlighted another structural challenge. The inverted duty structure in GST often results in accumulated ITC that cannot be fully utilized. “This mismatch increases operational costs and creates inefficiencies. Unless this anomaly is addressed, insurers will continue to face pressure on margins even if customers benefit from lower premiums,” Jain explained.
Legal experts believe a more balanced solution could be a partial reduction in GST rather than a blanket exemption. Brijesh Kothary, partner at Khaitan & Co, suggested that keeping a nominal rate, such as 5%, would strike the right balance. “This approach lowers the tax burden for policyholders while ensuring the ITC chain remains intact. It prevents the cascading of hidden costs,” he said.
Industry insiders also seem to favor this middle path. Gurpal Singh Dhingra, Joint Managing Director of Prudent Insurance Brokers, said the sector generally supports a lower GST slab. “A rate of around 5% preserves ITC and provides relief to consumers without destabilizing insurers’ cost structures,” he noted.
Some insurers see potential long-term benefits even if short-term challenges remain. Manish Kumar Goyal, Chairman of Finkeda, argued that reduced GST would enhance affordability in under-penetrated segments such as health, term, and motor insurance. “While margins may face initial pressure, broader coverage will expand the market base, creating economies of scale and greater financial inclusion,” he said.
From the government’s perspective, a GST exemption could result in revenue foregone—estimated at around ₹9,700 crore annually. Yet, policymakers may weigh this against the potential long-term boost to insurance penetration, healthcare access, and financial security.
Ultimately, the GST Council’s decision will need to balance consumer affordability, government revenues, and insurers’ financial stability. A complete exemption offers short-term relief to policyholders, but risks unintended consequences if insurers pass on hidden costs. A partial reduction, many argue, could provide a more sustainable framework, ensuring that both customers and insurers benefit in the long run.
New GST framework: A proposal to exempt life and health insurance premiums from the 18% Goods and Services Tax (GST) has sparked debate across the financial services sector. While the move could reduce the cost of insurance for policyholders, experts caution that the decision may complicate matters for insurers, potentially squeezing their margins and leading to price adjustments. A group of ministers has already recommended a complete waiver, and the matter is expected to reach the GST Council in mid-September.
At first glance, scrapping GST on insurance looks like a win for customers. Lower premiums should improve affordability and help expand coverage, particularly in health and term insurance, where penetration in India remains low. However, industry executives argue that the elimination of GST would also remove insurers’ ability to claim input tax credit (ITC) on their expenses. Currently, ITC helps offset costs on commissions, rent, utilities, reinsurance, and distribution, thereby easing financial pressure on insurers. Without this mechanism, the overall cost burden could rise.
For instance, commissions on protection products often start at 35–40% before tapering down to an average of 5–6% over time. Alongside this, insurers spend roughly 10% on administrative costs. At present, they can set off a part of these expenses through ITC, effectively lowering their tax outgo. If GST is scrapped, that credit disappears, and insurers will have to absorb these unrecoverable costs. According to channel checks cited by Macquarie Capital’s Suresh Ganapathy, prices could even rise by 6–10%—undermining the government’s stated goal of reducing premiums for consumers.
The highly competitive nature of the term-insurance market complicates the issue further. If insurers raise premiums, they risk losing customers to rivals. If they hold prices steady, their margins could shrink, leaving little room for profitability. Many executives believe the most likely outcome will be a compromise: consumers may see savings, but not the full 18% that the exemption suggests.
Rakesh Jain, CEO of Reliance General Insurance, highlighted another structural challenge. The inverted duty structure in GST often results in accumulated ITC that cannot be fully utilized. “This mismatch increases operational costs and creates inefficiencies. Unless this anomaly is addressed, insurers will continue to face pressure on margins even if customers benefit from lower premiums,” Jain explained.
Legal experts believe a more balanced solution could be a partial reduction in GST rather than a blanket exemption. Brijesh Kothary, partner at Khaitan & Co, suggested that keeping a nominal rate, such as 5%, would strike the right balance. “This approach lowers the tax burden for policyholders while ensuring the ITC chain remains intact. It prevents the cascading of hidden costs,” he said.
Industry insiders also seem to favor this middle path. Gurpal Singh Dhingra, Joint Managing Director of Prudent Insurance Brokers, said the sector generally supports a lower GST slab. “A rate of around 5% preserves ITC and provides relief to consumers without destabilizing insurers’ cost structures,” he noted.
Some insurers see potential long-term benefits even if short-term challenges remain. Manish Kumar Goyal, Chairman of Finkeda, argued that reduced GST would enhance affordability in under-penetrated segments such as health, term, and motor insurance. “While margins may face initial pressure, broader coverage will expand the market base, creating economies of scale and greater financial inclusion,” he said.
From the government’s perspective, a GST exemption could result in revenue foregone—estimated at around ₹9,700 crore annually. Yet, policymakers may weigh this against the potential long-term boost to insurance penetration, healthcare access, and financial security.
Ultimately, the GST Council’s decision will need to balance consumer affordability, government revenues, and insurers’ financial stability. A complete exemption offers short-term relief to policyholders, but risks unintended consequences if insurers pass on hidden costs. A partial reduction, many argue, could provide a more sustainable framework, ensuring that both customers and insurers benefit in the long run.