Will Zero GST Actually Make Insurance Premiums Cheaper?

The Indian government is currently considering a sweeping GST reform under the GST 2.0 plan, which includes a proposal to reduce—or even eliminate—the existing 18% GST on life and health insurance premiums. The aim is to make insurance more affordable and boost penetration in India

While this may provide consumer relief, industry experts warn that the reality may play out differently.

Why the Promise Doesn’t Always Equal the Payoff

1. Input Tax Credit (ITC) Could Be Blocked

Under the current system, insurers collect 18% GST on premiums but can claim Input Tax Credit on GST paid for their business expenses—like agent commissions, reinsurance, rent, technology, call centers, and administration. Removing GST on premiums would also eliminate this offset, driving up costs for insurers.

For example, business costs previously covered by ITC would now become stranded expenses, potentially pushing insurers to raise base premiums.

2. Policy Type Matters—Not All Benefit Equally

Term and Health Insurance Plans:
These policies are purely risk-based, with minimal or no investment component. They are likely to see a direct benefit from GST removal.

Traditional Life Plans & ULIPs (Unit-Linked Insurance Plans):
These often include significant savings or investment portions—up to 30–40% in traditional plans and 80–95% in ULIPs. Since GST is only levied on the risk portion, the impact of zero GST on total premium is relatively small.

3. Insurers May Offset Losses with Higher Base Premiums

Several experts caution that without ITC, insurers’ operational costs could rise—leading them to pass these costs on to policyholders through higher premiums. Even with zero GST, the net benefit to the consumer may be limited or negligible.

Meanwhile, some believe that lowering GST to a modest rate such as 5%, while retaining ITC, offers a better balance—ensuring affordability without destabilizing insurer margins

What’s Happening Now?

Government & GST Council Moves

• The Group of Ministers (GoM) has proposed full GST exemption on individual life and health insurance premiums. This is awaiting final approval by the GST Council, expected around October.
• Some states have voiced concerns over potential revenue losses—estimated to be as high as ₹10,000 crore
• Insurance stocks, including HDFC Life and SBI Life, saw gains due to investor optimism surrounding this proposal.

Expert Commentary

• Dhruva Advisors called the proposal commendable but emphasized how implementation details (specifically, handling ITC) will determine actual benefit.
• Reliance General Insurance flagged that blocking ITC could increase operational costs that may eventually be passed on to consumers.
• Fortune India urged a balanced approach: a reduced GST rate with ITC is ideal for sustainability.

Summary Table

Aspect	What Happens with Zero GST
Term & Health Policies	Likely to benefit more (no investment component)
ULIPs & Life Policies	Minimal benefit due to investment portion & taxed base
Insurer ITC	Eliminated—costs could increase without offset
Premium Pass-through	Mixed—depends on insurer strategy and competitive pressure
Balanced Alternative	GST at 5% + ITC retention offers better transparency & affordability

Final Takeaway

Zero GST on life and health insurance premiums sounds consumer-friendly—but benefits may be diluted unless the reform is structured carefully. Term and health-only policies could become noticeably cheaper. But for traditional or ULIP-type plans, savings are likely to be limited. Plus, without ITC, insurers may face cost pressures, which could lead them to adjust base premiums upward.

A more pragmatic solution might be a reduction (e.g., to 5%) coupled with retention of ITC, creating a win-win for both consumers and insurers.

Let’s watch for the GST Council’s final decision in October—its design and execution will be key to making the relief meaningful.