The idea sounds simple enough: scrap the 18% Goods and Services Tax (GST) on life and health insurance, and watch premiums go down. Win-win for customers, right? Well, not quite. A proposal to exempt these products from GST has set off a heated debate in the financial services sector. While policyholders may cheer the possible savings, insurers warn the move could complicate their cost structures, eat into margins, and even backfire on affordability in the long run.
Irrespective, a group of ministers has already backed the proposal, and the matter is expected to come before the GST Council in mid-September. If approved, this would mark one of the biggest tax tweaks for the insurance industry in recent years.
Why policyholders are excited
On the face of it, removing GST looks like an obvious win for customers. Lower premiums could make insurance, especially health and term plans, more affordable in a country where penetration still lags behind global peers. For many families, even a small reduction could make the difference between buying a policy or skipping it altogether.
But the story doesn’t end there.
The ITC problem nobody’s talking about
Today, insurers can use input tax credit (ITC) to offset part of their costs – think commissions, rent, utilities, reinsurance, and distribution. Take commissions, for instance: on protection products, they can start as high as 35–40% before dropping to an average of 5–6% later. Add another 10% in administrative costs, and the bill isn’t small. ITC cushions some of this burden.
Remove GST, however, and ITC disappears. That means insurers will be stuck absorbing unrecoverable costs. According to Macquarie Capital’s Suresh Ganapathy, premiums could actually rise by 6–10%, the absolute opposite of what the government wants.
A tightrope walk for insurers
The term-insurance market is fiercely competitive. If insurers hike prices to recover costs, they risk losing customers to rivals. If they hold prices, margins shrink. Neither outcome is sustainable. Many executives believe the real-world result will be somewhere in between – yes, consumers will save, but not the full 18% you see on paper.
Rakesh Jain, CEO of Reliance General Insurance, points to another structural headache: the inverted duty structure under GST, which leaves insurers with ITC balances they can’t always use.
“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,” he said.
Why a middle path may work better
Legal and industry voices alike are calling for compromise. Brijesh Kothary, partner at Khaitan & Co, suggests a nominal GST rate – say 5% – instead of a full exemption. “This keeps the ITC chain intact while lowering the tax burden on policyholders. It prevents hidden costs from creeping back in,” he explained. Brokers too seem to prefer this option. Gurpal Singh Dhingra, Joint MD of Prudent Insurance Brokers, said, “A rate of around 5% preserves ITC and provides relief to consumers without destabilizing insurers’ cost structures.”
Thinking big: Some insurers are taking the long view. Manish Kumar Goyal, Chairman of Finkeda, argues that even if margins take a short-term hit, cheaper premiums could widen the market in health, term, and even motor insurance. “Over time, greater coverage creates economies of scale and expands financial inclusion,” he noted.
For the government, though, there’s a price tag attached. Waiving GST on life and health insurance could cost the exchequer about ₹9,700 crore annually. Still, policymakers may decide that boosting insurance penetration, healthcare access, and financial safety nets is worth the trade-off.
A post-election push
Interestingly, the idea gained traction after the 2024 Lok Sabha elections, when a senior minister floated it as a way to make insurance more affordable. According to a report, the Union government has already sent a formal proposal to the group of ministers in the GST Council. If approved, this could be a big win, especially for taxpayers under the new tax regime, who don’t get deductions on insurance premiums. Even modest savings could free up disposable income for households, assuming, of course, insurers don’t quietly raise premiums to offset their losses.
Waiting for clarity
The industry is now in wait-and-watch mode. Venkatachalam Iyer, Co-Chairperson of the Insurance Awareness Committee (Life), noted that India currently ranks 10th globally in life insurance, with penetration at just 3.2%. Any step that makes insurance more accessible could shift the needle, but clarity on implementation is crucial.
The Last Bit
