The proposal to has sparked hope among policyholders and industry stakeholders. The move, aimed at increasing affordability and widening insurance penetration, is seen as a step in the right direction, but experts caution that the actual benefit may vary across different types of insurance products.
Jignesh Ghelani, Partner at Dhruva Advisors, called the proposal “a commendable move aimed at increasing affordability and coverage.” However, he added that its effectiveness would depend on how the exemption is implemented, especially with respect to input tax credit (ITC).
“There are several types of insurance policies—pure term and health insurance, Unit Linked Insurance Plans (ULIPs), and traditional life insurance policies such as endowment or money-back plans,” Ghelani explained.
Currently, GST is levied at 18% on both life and health insurance premiums. But the actual taxable amount excludes the portion of the premium allocated for investments or savings, meaning the tax is applied primarily on the risk coverage component.
Term and health insurance policies, which carry no investment component, are likely to see the most significant reduction in costs if GST is fully waived. “Premiums in these categories are generally low and entirely attributable to risk coverage, so the exemption could make them much more affordable to the masses,” Ghelani said.
However, the impact on traditional life insurance policies and ULIPs may be limited. These products often have a large investment component—30% to 40% in early years for traditional policies and as high as 80% to 95% for ULIPs—reducing the taxable base under current rules. “Therefore, the direct impact of exemption may not necessarily bring a reduction of 18% in premiums for all types of insurance,” he added.
Experts also warn that , potentially offsetting some of the benefits.
Under the current system, insurers claim ITC on GST paid for services such as commissions, reinsurance, and administration. Removing GST on insurance premiums would eliminate this benefit, raising operating costs.
“Where GST exemption is allowed, the companies will not be able to avail ITC on purchases of goods and services, thereby increasing the cost of providing insurance services,” Ghelani said. “To this extent, savings on account of reduction in GST rates will be negated in cases where companies do not absorb the increase in cost.”
Mahesh Jaising, Partner and Leader, Indirect Tax at Deloitte India, echoed the concern. “Insurance, which has been the talk of the town for many months now, is expected to go the exemption route, which would be welcome by the common man as well as India Inc., which spends substantially on employee insurance,” he said. “However, we need to watch out for the fact that an exemption results in credit blockages which could impact cost. The industry hopes that key input services such as commission and reinsurance also receive exempt status.”
The consensus among experts is clear. If implemented well, the GST exemption could reduce costs for term and health insurance policies, making them more affordable for millions.
But for traditional life plans and ULIPs, the impact will likely be muted due to existing valuation rules and ITC-related cost adjustments.