Nil GST on insurance premiums: Zero rate may not make policies cheaper for individuals, say experts

The GST Group of Ministers (GoM) has proposed exempting health and life insurance premiums from the GST levy, a move aimed at making insurance more affordable. While this appears beneficial for policyholders, experts warn it may actually lead to higher premiums if implemented, as the final decision rests with the GST Council.

Currently, health and life insurance premiums attract 18% GST. For instance, a life insurance policy with a Rs 100 premium costs Rs 118, including tax. Insurers, however, benefit from input tax credit (ITC) on GST paid for office expenses, agent commissions, and marketing, which offsets part of the GST collected from customers.

If GST on premiums drops to zero, insurers may lose the ability to claim ITC on these expenses. Using the same example, the insurer pays Rs 12.6 in GST on operational costs, which they currently offset against the Rs 18 collected from customers. Without GST collection, the Rs 12.6 cost would directly hit the insurer’s finances. Experts said this additional burden would likely be passed on to policyholders, potentially increasing premiums rather than reducing them.

Rakesh Jain, CEO of Reliance General Insurance, welcomed the proposal but also highlighted structural challenges: “Lowering GST is a step in the right direction, making insurance more accessible, especially for middle-class households and small enterprises. However, issues like the inverted duty structure and unutilized input tax credits increase operational costs. Without addressing these inefficiencies, insurers may still face margin pressures even if customers see some relief.”

Hemik Shah, Co-Founder of Qian Insurance, told the Economic Times: “To determine if reduction in GST rate will help policyholders, we must first establish whether health and life insurance services are classified as Nil Rated or exempt from GST. If services are considered exempt, input tax credit will not be available, and savings from GST rate reduction will be negated by a hike in premiums due to unavailability of credit.”

However, Shah further noted that if health and life insurance are classified as Zero Rated or Nil Rated, then credit will be available and can be used to offset GST liability on other lines of business. “In the absence of ITC, it seems unlikely that insurance companies will be able to pass on the benefits. Unavailability of credit will make GST on goods and services a cost for insurers, potentially leading to higher premiums to maintain profitability and solvency,” he explains.

Besides, GST exemption on health and life insurance premiums may cause revenue loss of Rs 9,700 crore.

In conclusion, while the GoM’s proposal is a progressive step toward financial inclusion, the actual impact on premiums will depend on how GST classification is applied and whether insurers retain ITC benefits. True affordability for policyholders requires careful balancing of taxation rules, operational efficiency, and financial sustainability in the insurance sector.