The Goods and services Tax (GST) on insurance has always been a hot topic, especially since life and health insurance premiums attract 18% GST. With the GST Council set to decide whether to grant an exemption, the big question is: will this move actually make insurance more affordable for the common man? Let’s break it down.
India’s Low Insurance Penetration: A Reality Check
- India’s insurance penetration in FY 2024 stood at just 3.7% of GDP, far below the global average of 7–8%.
- Life insurance contributes 2.8% of GDP, while non-life contributes only 0.9%.
- Coverage is almost universal in countries like the UK, US, and Japan, but in india, large sections of the population still remain uninsured.
Clearly, affordability and accessibility remain biggest hurdles.
Tax Rates: india vs The World
- India: 18% GST – among the highest globally.
- Australia, UK, US: Life and health insurance are exempted.
- Many nations exempt essential insurance to encourage wider adoption.
This global comparison is one reason why the indian government is rethinking its stance.
The Dilemma: Revenue vs Relief
The insurance sector contributes over ₹10,000 crore annually in GST collections. Cutting taxes means a major revenue loss for the government.
Two options were discussed earlier:
Reduce GST to 5% with Input Tax Credit (ITC): Govt opposed – big loss of revenue.
Reduce GST to 5% without ITC: Insurers opposed – higher costs would cancel out consumer benefit.
After prolonged debates, the Group of Ministers (GoM) has recommended a complete exemption for individual life and health insurance. The GST Council will now take the final call.
Exemption vs Zero-Rating: What’s the Difference?
Here’s where things get tricky:
- Exempt Supply (Proposed): No GST on premiums, BUT insurers lose ITC on their expenses (marketing, agents’ commission, etc.). This increases their costs.
- Zero-Rated Supply (Ideal): No GST on premiums AND insurers can still claim ITC. This keeps costs lower for insurers and ensures maximum benefit for consumers.
If life and health insurance are only exempted, the actual consumer benefit may shrink.
Will Consumers Really Save?
- On paper, exemption from 18% GST should cut premiums by around 15%.
- In reality, since insurers lose ITC, higher costs could eat into the benefit.
- Net savings for consumers may end up being only 6–7%.
So yes, premiums will drop, but maybe not as much as expected.
Why It Still Matters
Despite the challenges, an exemption could still:
- Attract first-time buyers, making insurance more affordable for the middle class.
- Encourage existing policyholders to expand coverage, especially in health insurance.
- Support growth in one of India’s fastest-growing financial segments.
In short, even a modest cost reduction may increase insurance penetration over time.
Challenges Ahead for Insurers
- Insurers will need to adjust to partial ITC reversals since commercial insurance (marine, fire, etc.) will remain taxable.
- Increased compliance and accounting complexity may burden companies further.
- Without safeguards, insurers may be unable to pass on full benefits to customers.
The Way Forward: Reform with Caution
For real impact, the government could:
- Consider making life and health insurance zero-rated instead of exempt.
- Allow partial ITC retention for insurers to prevent cost escalation.
- Ensure that the benefit of exemption is monitored and passed on to policyholders’.
Final Takeaway
The proposed GST exemption is a positive step toward affordability and inclusion, but it comes with caveats. Unless the government carefully balances revenue concerns with ITC adjustments, consumers may see only partial savings.
If implemented smartly, this move could boost insurance penetration, make healthcare accessible to more Indians, and turn insurance into a true safety net for millions.
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk..jpg)
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