GST Council meet: Life, health insurance may get GST relief, but will consumers benefit?

The 56th meeting of the Goods and Services Tax (GST) Council has begun, and all eyes are on what could be one of the biggest reform measures in recent years — the proposal to fully exempt life and health insurance premiums from GST. If approved, the move is likely to be announced as the Modi government’s much-anticipated ‘Diwali gift’ to citizens.

While the Centre is keen on exempting life and health insurance from the 18% GST levy, some states have urged caution. Their concern is that the real benefit should reach policyholders, and not be cornered by insurance companies. If insurers fail to lower premiums in line with the tax relief, consumers may see no change, while companies pocket the gains.

The Council, which is meeting on September 3–4, has the backing of the Group of Ministers (GoM) on GST rate rationalisation for this proposal. It comes as part of a broader agenda to simplify the current multi-slab system and gradually shift to a streamlined two-rate structure of 5% and 18%.

The ITC dilemma

Experts warn that exemptions under GST are not always as beneficial as they appear. Dinkar Sharma, Company Secretary and Partner at Jotwani Associates, noted that a waiver may look like instant relief, but it blocks insurers from claiming input tax credit (ITC) on costs such as technology, consultancy, and utilities. Without ITC, these expenses become unrecoverable.

“Instead of reducing prices, exemptions can push up hidden costs. Insurers working with narrow margins may build these costs into premiums, neutralising or even reversing the intended relief,” Sharma explained.

Short-term relief, long-term risks

Santosh Meena, Head of Research at Swastika Investmart, added that while GST relief could create a near-term surge in demand and lift insurance stocks, the details matter. “A full exemption could become a value trap if insurers lose ITC, because they may be forced to raise base premiums. A smarter path is reducing the rate to 5% while keeping ITC intact. That way, consumers pay less, insurers manage costs, and the industry grows sustainably,” he said.

Why exemption may backfire

Past experience with exemptions under GST and earlier tax systems shows that they rarely translate into lasting benefits for end users. Denying ITC disrupts the credit chain, distorts pricing, and reduces transparency. Analysts argue that rather than a 0% rate, a lower 5% tax slab with ITC rights preserved would deliver a cleaner, more efficient outcome.

In fact, completely scrapping GST on insurance could inadvertently drive insurers into higher operational costs, estimated at 7–10%, which may be transferred back to customers through premium hikes. This scenario risks nullifying the very purpose of the reform.

Implications for investors

For investors, the Council’s decision carries significant weight. According to Meena, three scenarios stand out:

Near-Term Catalyst: Any reduction in GST would lower insurance costs, sparking demand in an under-penetrated market and initially boosting insurance stocks.

The Value Trap: A full exemption could backfire as insurers lose ITC, raising costs and undoing consumer gains. Investors jumping in early may find stock rallies short-lived.

Sustainable Growth: A reduction to 5% with ITC retention is the best-case outcome. It keeps premiums affordable, helps insurers balance costs, and ensures that growth in demand is genuine and lasting.

As the Council deliberates, the stakes are high. What is presented as a festive bonanza could either provide real relief to millions of policyholders or end up as another case of tax reform with unintended side effects.