A sweeping change could make life and health insurance more affordable for millions of Indians.
It has been reported that a proposal has been made to exempt premiums for life and health insurance from Goods and Services Tax (GST), a move that could bring down costs and boost insurance penetration.
WHAT’S THE CURRENT GST BURDEN ON YOUR POLICY?
At present, every time you buy a new life or health insurance plan or renew an existing one, you pay 18% GST on the premium. For example, if your annual premium is Rs 20,000, the tax alone adds Rs 3,600, taking your total payment to Rs 23,600.
This applies to individual policies as well as family floaters, making GST a significant component of the overall cost.
The tax is levied on the gross premium, and in the case of certain single-premium life policies, different components attract different rates. For instance, some traditional plans apply 4.5% on the first-year premium.
But for most regular policies, the effective rate remains steep.
WHAT’S THE NEW PROPOSAL?
Under the new proposal, the entire GST component would be removed. If approved by the GST Council, you would pay only the base premium quoted by your insurer, with no additional tax. Industry experts estimate this could bring down the effective cost of policies by about 15%.
The proposal comes from a Group of Ministers (GoM) tasked with rationalising tax slabs and improving insurance penetration across the country.
The Centre is strongly backing the move, calling it a big step towards financial inclusion. Some states, such as Telangana, support the idea in principle but worry about losing revenue, as per reports.
GST on life and health insurance generated about Rs 8,262 crore in FY24, with another Rs 1,500 crore coming from health reinsurance. Therefore, eliminating this would create a revenue shortfall of nearly 10,000 crore for states collectively.
While a few states argue that the consumer benefit outweighs this loss, others want clarity on whether insurers will pass on the full benefit to policyholders.
WILL PREMIUMS ACTUALLY FALL?
On paper, the answer is yes. But there’s a catch. Insurers currently claim input tax credit (ITC) for GST paid on backend costs such as technology, customer service and distribution.
If GST on premiums is removed, this credit disappears, making those costs non-recoverable, according to experts quoted in a report by The Economic Times.To offset the loss, insurers may raise the base premium.
Analysts say a better solution would have been to make insurance “zero-rated” instead of exempt. That way, no GST would be charged to customers, but insurers could still claim ITC.
WHEN WILL THE DECISION BE TAKEN?
The proposal is expected to come up for discussion in the next GST Council meeting scheduled for mid-September 2025.
The Council will weigh the GoM’s report, state views and industry feedback before taking a call. If approved, the new rules could kick in around the festive season, possibly by Diwali.
WHAT SHOULD POLICYHOLDERS DO NOW?
If you are planning to buy or renew a policy, it might make sense to wait. Removing GST could reduce your outgo by a substantial margin, provided insurers pass on the benefit.
Watch out for official announcements and, later, for whether insurers revise their premium rates transparently.
If implemented effectively, this reform could make financial protection more affordable for millions of families and encourage wider adoption of insurance.
But the extent of real-world benefit will depend on how insurers adjust their pricing and how the government enforces the pass-through of tax savings to customers.
For now, all eyes are on the GST Council. If the exemption gets the green light, India could see one of the most consumer-friendly tax reforms in recent years
