Zero GST on Insurance Premium Won’t Necessarily Make Policies Cheaper: Here’s Why
Zero GST on insurance premiums may look like relief, but without input tax credit, insurers could raise base premiums, meaning policies may not actually get much cheaper
In the Independence Day speech this year, Prime Minister Narendra Modi spoke about a major revision of the Goods and Services Tax (GST), often called GST 2.0. One of the big proposals under discussion is removing GST on insurance premiums.
Today, when you buy or renew a health or life insurance policy, you pay 18 per cent GST on top of the premium. So, if your policy premium is Rs. 20,000, you end up paying Rs. 23,600 in total. Under the new proposal, you would only pay the base premium of Rs. 20,000, without any extra tax.
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This sounds like a big win for policyholders. But experts say the reality is more complicated and the final cost of your policy may not fall as much as you expect.
Why insurers may not pass on full savings
Right now, insurers enjoy something called Input Tax Credit (ITC). This means they can claim back the GST they pay on business expenses like commissions to agents, technology systems, customer service, and marketing. ITC helps them reduce their overall tax burden and keeps premiums relatively stable.
If GST on insurance premiums is removed, insurers will lose this credit. They would then have to bear the full tax on their expenses themselves. To cover these higher costs, insurers are likely to raise the base premium of policies.
Short-term vs long-term effect
In the short term, customers will see smaller bills. A policy that currently costs Rs. 29,500 (Rs. 25,000 premium + GST) would drop to Rs. 25,000. But over time, as insurers raise base premiums to recover their costs, much of this benefit could disappear. Efficient insurers may absorb some of the cost, but many will eventually push it back to customers.
If the government removes GST on insurance premiums, insurers will no longer be able to claim input tax credit on their business expenses. This means they might increase the base premium to make up for the higher costs. Even though removing GST seems like a benefit for customers, it may not lead to lower prices in the long run.
This creates a concern about whether insurers will pass the savings to customers or keep the benefit for themselves. Regulators may need to make sure that customers actually get the benefit of the GST change.
Alternatively, experts suggest that reducing GST to a lower rate (e.g., 5%) while keeping ITC intact would actually benefit policyholders more. For example, on a Rs. 25,000 premium, GST at 18% is Rs. 4,500. At 5%, it would be only Rs. 1,250, a saving of Rs. 3,250. In contrast, under zero GST (with no ITC), insurers might increase the premium, cutting into customer savings.
The bigger picture
Making premiums GST-exempt also creates a problem called an inverted duty structure. Insurers will still pay GST on inputs but won’t be able to adjust it against collections, which makes the system less efficient and increases long-term costs.
The government hopes this move will encourage more Indians, especially first-time buyers and middle-class families, to buy insurance. And in the short term, it probably will. But whether the relief is lasting will depend on how insurers set their prices and how regulators ensure that the savings truly reach customers.
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